27. Lithuania
SMEs account for 99.5% of all enterprises operating in Lithuania, the majority of them (83.7%) being micro-enterprises. Most SMEs (73.0%) have chosen the legal form of private limited liability company and are primarily engaged in wholesale or retail trade activities (more than one-fourth of all SMEs). The share of employees working in SMEs is around 71%, while the share of gross value added generated by SMEs is close to 65%.
Liabilities to non-banks (e.g. loans, trade payables) and equity capital are the main sources of funding for SMEs. As of 2020, equity capital financed around 45 % of SME assets, while liabilities financed 55%.
As a result of a decrease and structural changes in large NFCs’ (non-financial corporations) loan portfolios , the share of SME loans over total business loans increased by 17%. Since 2019 and amounted to 59% of the total.
SME non-bank financing has varied over time. For example, up until 2017, the use of credit unions or crowd-funding was much lower than now: between 2017 and 2020, the credit union loan portfolio increased by two times and the crowd-funding market evolved from EUR 1 million to around EUR 40 million. However, according to the annual survey of non-financial enterprises conducted by the Bank of Lithuania, only 10% of enterprises are in need of alternative financing instruments (e.g. private capital or risk funds, crowdfunding, etc.). However, an increase in non-bank funding may be the result of tighter lending conditions. For example, the results of the same survey indicate that the share of rejected loans for micro-enterprises increased in 2018 and remained elevated until 2020, reaching around 60%.
The government supports SMEs by ensuring that they benefit from favourable conditions to obtain the necessary financing to start and develop their business. Loans with preferential rates are granted under the EU Entrepreneurship Promotion Fund. Moreover, when a company does not have sufficient collateral, it can apply to the state-controlled enterprise UAB Investicijų ir verslo garantijos (Investment and Business Guarantee Enterprise, INVEGA), which provides various options of loan guarantees, factoring, leasing and export credit repayments. INVEGA also provides an option for different preferential loans through alternative financing or crowdfunding and loans with preferential rates from the different Venture Capital funding services. In addition, municipalities provide different support schemes to SMEs; for example, when starting a business, entrepreneurs can expect support to cover their set-up costs, part of the interest payments, as well as other supports.
SMEs account for a vast majority of all enterprises operating in Lithuania. According to Statistics Lithuania, 87 707 SMEs operated in Lithuania at the beginning of 2021, which accounts for 99.5% of all enterprises in the country. This number grew by almost a third over the past ten years, but its share of total enterprises remained broadly unchanged. The majority of SMEs are micro-enterprises (83%). Over a decade, the number of micro-enterprises increased by almost 39% and their share among all SMEs grew by 4.5 percentage points.
SMEs remain the most significant contributor to the domestic economy, creating almost 65% of gross value added and contributing to half (51%) of domestic exports of goods. In early 2019, SMEs employed about 71% of all persons employed in Lithuania. SMEs largely concentrated in the trade sector. Slightly more than a fifth of all SMEs operate in the retail and wholesale sectors, whereas the share of employees’ accounts for around 22% of all SME employees. The manufacturing, construction, and transport sectors are also relatively large, as SMEs in these sectors employ about 20%, 12%, and 12% of the total workforce respectively. The share of other economic branches is much smaller. SMEs are playing a great role in investments as well. In 2019, SMEs’ investments amounted to 61% of all tangible investments among enterprises. Even though SMEs total investment has increased by a half in 5 years, the SMEs role in total investment is decreasing: this share has decreased by 7 percentage points in the same period.
The level of indebtedness of SMEs operating in Lithuania is relatively not high. As of 2019, the ratio of SMEs liabilities to assets accounted for 51% and remained broadly unchanged. According to the NFCs survey results, the SMEs operational funding through their own funds is also broadly unchanged. In 2020, about 66% of all enterprises stated that they were using internal resources as their main source of funding (e.g. more than 60%). It is likely that such trends are partly determined by riskier credit, which results in less lending opportunities for SMEs compared to large enterprises having more capital as a collateral.
As for external sources of funding, SMEs most frequently choose trade payables, loans from other NFCs and other non-bank sources to finance their activities. By the end of 2019, loans from credit institutions accounted for 21% of all SME liabilities. Nevertheless, lending to SMEs plays an important role for banks operating in Lithuania. By the end of 2019, loans given to SMEs accounted for 42% of the total portfolio of loans to non-financial enterprises. To compare with 2019, an increase in SMEs loan portfolio in 2020 accounted for 17%. However, it was determined not only by lower demand of loans from big companies but also some structural changes in NFCs loan portfolio. As soon as the first quarantine started in Lithuania, the NFCs borrowing was rather sluggish: while SMEs portfolio was rather stable, higher decrease was noticeable in bigger enterprises portfolio. The drop in NFCs loan portfolio in 2020 was mainly driven by uncertainty, postponed investments, reserves sales and state support measures which in 2020 accounted for around EUR 3 billion, which is equal to almost 40% of total NFCs loan portfolio. However, increasing expectations and investment recovery together with favorable lending conditions (e.g. interest rates remaining relatively low) has already stabilized a drop in NFCs loan portfolio declining to a lower extent (from -12.5% at the end of 2020 to -8.8% in 2021 April). Moreover, the Bank of Lithuania projects that GDP, investments and private consumption should pick up in 2021 by 5.1%, 8.5% and 6.2%, respectively.
Even though interest rates remain relatively low, nearly a half of SMEs surveyed by the Bank of Lithuania in 2018-2020 stated that lending to them is fully or partially limited. The average interest rate of loans to non-financial enterprises (including renegotiations of previously granted loans) stood at 2.88% in 2020 and slightly decreased (0,12 p.p.) since 2019 but increased by 0,12 p.p. to compare with 2018. While the price of small loans (< EUR 1 million) remained broadly unchanged (3.17%). However, the number of applications rejected by credit institutions have been rather high but stable. About 59% of micro and 31% of small enterprises stated that their applications for a new loan or change of the terms and conditions of a current loan were not satisfied (in 2019, 61% and 29%, respectively). For example, in 2019 more than a third of the surveyed enterprises stated that the main reason for the rejection of their application was their weak financial conditions and more than 10% claimed that they had high leverage.
The survey of commercial banks operating in Lithuania which was conducted in 2020 showed a relatively high tightening of lending standards. For example, the lending conditions were tightened in relation to the size of loans or credit lines and collateral. According to the survey, the main reasons behind the change in lending standards in H1 2020, were an increase in perception of risk due to economic perspectives, worsening indicators for some enterprises and lower risk tolerance. However, since H2 2020 lending conditions were less tightened, and the most recent surveys indicate that lending standards are back to pre-pandemic levels1. However, eventhough lending conditions are back to pre-pandemic levels, lending is relatively more restricted to the hotels and restaurants, in comparison with other business activities.
SMEs operating in Lithuania mainly tend to use traditional funding measures, i.e. own funds, trade credits, loans and financial leasing. Although 2019 survey results show that a third of micro-enterprises and a quarter of small enterprises experience a need for alternative funding sources, most of them do not use such sources (in 2020 the need was only 10% due to pandemic). For example, in 2019 only 3% of micro-enterprises stated that they will use more crowdfunding and 9% of small enterprises claimed that they will keep using it. Even though the flows of crowdfunding are increasing significantly from EUR 1.3 million in 2017 to EUR 40 million Eur in 2020, it still accounts only for 0.5% to compare with the NFCs loan portfolio. In 2020, government support (except from COVID-19 related measures) was used mostly by micro-enterprises (26%) while the usage among small enterprises was more sluggish (17%). EU structural funds were used by 6% of micro and 7% of small enterprises. According to the surveys, the latter has decreased since 2019 by 7 p.p. Private equity funds still do not have a significant impact on the structure of SME financing.
In 2020 the number of bankruptcy proceedings (775) halved compared to 2019 (1608) and in the beginning of 2021 there were even fewer bankruptcies. Historically speaking, almost all of the bankruptcies (more than 99%) are experienced by SMEs. However, the smaller number in bankruptcies in 2020 was driven at least by two reasons. One was the change in law, so that the initiation of bankruptcies may not be applied during the quarantine and 3 months after it. The other reason was a generous state support which improved the liquidity of corporates. As a result, we expect an increase in the number of corporate bankruptcies after the quarantine and government measures expire.
Some of the financial indicators (revenues, share of profitable corporates, profitability, etc.), shows that since the beginning of pandemic, the most affected business sector in Lithuania has been services. It includes such economic activities as entertainment, housing and catering, business administration, education. However, these activities comprise around one-tenth of the MFIs loan portfolio to NFCs. On the other hand, the losses may be bigger if difficulties of the most affected companies will be passed to the other corporates. Smaller banks are somewhat more exposed to the vulnerable companies, as they have larger share of SME loans and generally provide credit to riskier firms than the largest banks.
The higher SME risk is also illustrated by non-performing loan portfolios in banks. At the end of 2020, the share of non-performing loans granted to SMEs amounted to 4.9%, while the total non-performing loan portfolio amounted to only 2.2% (3.5% for non-financial enterprises). However, in spite of higher risk, the overall share of non-performing loans issued to SMEs has stood rather stable since 2019 and decreased by about 1.7 p.p. since 2018.
Loan instruments
Entrepreneurship Promotion Fund 2014–2020 (contracts are signed until 2023 September)
This instrument is aimed at entrepreneurs wanting to start a business, or micro-enterprises and small enterprises which have been in operation for up to one year. EUR 24.5 million have been earmarked for the implementation of this instrument. Under the instrument, loans with preferential rates up to EUR 25 000 are issued for up to 10 years. The interest rate equals the 3-month EURIBOR rate (only for 10% of the loan) and a fixed interest margin of 3%.
Open Credit Fund 2 (OCF2)
This programme offers funding in a form of loan, leasing or credit line to SMEs that are starting or developing a business, with favorable interest rates (for investment and working capital). The maximum loan amount is EUR 600 000, provided that a credit institution adds to the investment project being implemented no less than 51% of own funds. In total, up to EUR 63.65 million of funds are earmarked for the implementation of this programme.
Risk-shared loans
This instrument is financed by the European Regional Development Fund and is aimed at decreasing business entities’ financing costs. Its objective is to ensure the accessibility of financial sources to SMEs and to reduce the credit risk. All SMEs are eligible for this measure, and the maximum loan amount per SME is EUR 4 million. However, the number of loans for one entity is not limited. Funding can be provided in the form of a loan or credit line. 45% of investments can be financed under this instrument, while the remaining part should be covered by the own funds of the entrepreneur. The maximum term of the loan is 10 years (3 years for a credit line). A large share of the loan (45%) is granted with an interest rate of 0%, while the remaining share is provided at the annual interest rate based on market conditions. A total of EUR 67.79 million is earmarked for this measure.
Crowd Funding Loans Aviete
These loans enable SMEs to borrow through crowdfunding platforms. The total amount earmarked for financing of Aviete loans is EUR 10 M of the funds repaid and/or to be repaid to the INVEGA fund. The maximum amount per loan is EUR 10 000 and funding can be provided up for to 40% of the total loan amount. A loan may be granted for a period not exceeding 36 month and it is intended to finance both investments and circulating capital, except for the refinancing of financial obligations, financial activities and residential real estate. Loans are granted through crowdfunding platforms. Crowdfunding platform operators, which have signed cooperation agreement for the implementation of Aviete loans, will select those business projects which will be co-funded under Aviete.
Alternative financing for SMEs Alternatyva
This programme offers funding in a form of loan, leasing or factoring to SMEs that are starting or developing a business. This financing enables SMEs to borrow for investment or working capital needs. The total amount earmarked for financing of Alternatyva is EUR 91 million of the funds repaid and/or to be repaid to the INVEGA fund and state budget. The maximum amount per funding is EUR 200 000 and funding can be provided up for to 90% of the total amount. A loan may be granted for a period not exceeding 24 months.
Direct Covid-19 Loans and Tax Deferrals
These instruments were used by all sizes of enterprises. The direct loans and loans for most affected enterprises were important to sustain the liquidity and solvency for the affected businesses under favourable conditions. The tax deferral was one of the biggest support measures which provided a sudden liquidity and an opportunity to pay back taxes in the near future without paying any interest in the medium-term under favourable conditions.
Guarantee instruments
Individual guarantees
There have been four types of individual guarantees which have been adjusted to COVID-19 crisis and could have been used as a support measures for enterprises, including SMEs: exporting guarantees (up to 90 %), guarantees for travel agencies (up to 50%), loans (up to 80%), leasing (up to 80%).
Portfolio guarantees
These guarantees have been designed in light of the challenges related to unattractive or insufficient security deposits and are provided for loans taken by SMEs. Under this measure, credit institutions selected by INVEGA apply more favourable requirements and lower interest rates for security deposits, including such loans into their portfolios of guaranteed contracts. The repayment of up to 80% of the principal amount of loan is secured to a credit institution. With Portfolio guarantees, financial institutions require a smaller down payment and apply a lower interest rate compared to market conditions.
Venture capital investments
INVEGA currently implements or develops 13 venture capital instruments. However, all of these instruments have been implemented separately from the measures tackling COVID-19 crisis and all of them are continuously running.
Compensation measures and subsidies
Compensation of loan interest
Under this instrument, enterprises are subject to partial compensation of interest for funds up to EUR 200 000 borrowed. Up to 95% of the interest actually paid can be compensated for up to 36 months but not more than 7% of interest.
Partial Compensation of Lease Payments for Businesses most affected by COVID-19
Rent compensations were paid for those working under individual activity under a business certificate. The maximum amount paid per individual activity was 70% of its fixed costs and up to EUR 20 000 in total. The instrument was terminated in 2021 April.
Labour costs compensation
A recipient of a loan under the European Social Fund 2 is also entitled to a compensation of its wage costs. For the partial compensation of wage costs, a fixed monthly rate of EUR 498.48 has been set, while the maximum compensation period is 12 months.
Subsidies for employees’ downtime and after downtime
These subsidies aimed to the enterprises which employees were on a downtime. However, the subsidies were paid not only for SMEs but all the eligible enterprises. What is more, these subsidies comprised about a third of all the support measures for enterprises. These instruments have already been terminated.
Subsidies for microenterprises
Enterprises which have had 1 to 9 employees have been eligible to obtain the subsidy and use it to support the liquidity. There was EUR 100 million allocated for this instrument and it has been fully obtained in 2020.
Source: See Table 27.3.
References
Lithuanian statistics department - https://www.stat.gov.lt
Bank of Lithunia – www.lbank.lt
INVEGA – www.invega.lt
Notes
← 1. For more information see the Bank of Lithuania Reviews on the Bank Lending Survey:
https://www.lb.lt/en/reviews-and-publications/category.40/series.196?category=&series=&ff=1
← 2. For more information see: https://invega.lt/en/business/financial-measures-for-business-during-covid-19-crisis/189