It’s no secret that the first priorities in Ukraine are those involving privatization, as well as defining and enforcing rules of conduct in big business. Small and medium businesses have been left to the side. Small enterprises, like the big ones, are in no hurry to show their actual returns – almost every second enterprise keeps a considerable part of its income secret. Though many businesspeople claim they would sincerely like to work legally, a generation has already matured that is accustomed to receiving wages in cash and simply does not imagine that commerce may be different. As a rule, low-paid workers receive their wages legally; parts of these wages are allotted to all the taxes and social transfers. On the other hand, highly-paid workers still receive a salary in envelopes, or they work as private entrepreneurs in the same companies.

In 2001, small and medium enterprises comprised 97.5% of all Ukrainian enterprises. By January of 2003, 4.3 million people worked in them. In 1991, the dawn of Ukrainian independence, an estimated 47,000 small enterprises were operating in Ukraine , a large comedown from the 248,000 registered businesses the year before in 1990.     

BANK LENDING

According to sociological studies, 60% of Ukrainian entrepreneurs believe it is impossible to take out a loan. Many private entrepreneurs are not psychologically ready to take out loans in banks because they believe the process is too lengthy and complicated. The owners of these small and medium-sized businesses cannot, however, complain that banks don’t pay enough attention to them. Bankers attribute entrepreneurs’ hesitancy to fear of the thorough examining process and an absence of liquid assets. Banks also demand a lot of paperwork: a business plan, expert evaluations, and various financial calculations.

To expedite the process, banks are ready to provide small loans as few as 3-5 days after receiving an application, and then, in some cases, to annul the deposit treaty and pass on to bailing. For example, starting in July, “Privatbank” created its new “Express” service for small businesses in Lviv, Odesa, Mykolaev, Lutzk, Vinnytza, Zaporozhia, Donetzk, Rivne, and Kramatorsk . This provides fast small business loans without a down payment. The bank lists the advantages “Express” credit as: a quick and efficient application process, no need to officially register a pledge, and few documents needed to give to the bank. The bank plans to introduce “Express” crediting in all major cities soon.

At the same time, bankers say demand for loans at individual branches often exceeds the amount of free capital the branch has to offer. (in 2003, loans increased by 61.4%, while bank capital increased by only 30,7%).

 

 

 

 

International support

Banks often provide loans from money provided to them by international lending agencies. Their preference is mostly due to the advantageous terms the international agencies offer. (short or long-term credit at low interest rates that change in line with LIBOR interest rates)  

(EBRD)

The European Bank of Reconstruction and Development is the pioneer in lending to small and medium business. The first backup line of credit dedicated to these business sectors was opened as early as 1994. This line of credit is 100m Euros. A second line worth US $88m was opened to the same sized enterprises in August of 2000. Of this second sum, $66 million dollars is allotted for small and medium-sized businesses and 22 $ million to administer the micro-lending program. The first tranche of the second line was spent by the end of June 2003. In September of 2003, the EBRD opened a second tranche in the the second line worth US $33m.

In April of 2004, the EBRD held an award ceremony for the winners of the third (and last) contest for the best business project in its second line of credit. “Azhio” Bank won for a project run by its client company “Eksar.” The project called for a five-year’s loan worth US $377,000. As part of the terms of the contest, Eksar got a privileged “Libor” + 4%” rate on the loan.(standard interest rate -Libor+ 8%).

EBRD provides long-term loans for purchasing means of production as well as short-term financing for raw material, replacement parts, export contracts, and financial leasing. The debtor must also have assets worth no less than 30% of the amount requested.

The following banks service EBRD loans: “Aval”, “Azhio”, “Privatbank”, “Forum”, “Nadra”, “Gazprombank” “TAS-Komertzbank”, “MicroFinancial Bank”.

KFW

Small and medium enterprises (with a maximum of 20 permanent employees) are eligible for loans from the Lending Agency of the German-Ukrainian Fund for Restoration. The main requirement is that the business project must not be one prohibited by the EBRD, in other words it must not involve traffic in arms, tobacco, alcohol etc. A firm can receive a six-month credit to replenish its circulating assets or a year’s long credit to replenish its fixed capital. “Azhio”, “Aval”, TAC-Komertzbank”, “Privatbank”, “VABank”, and “Micro financial bank” service these micro-lending back-up lines.

THE INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT

The International Bank of Reconstruction and Development runs a program to help small and medium-sized businesses (the number of workers at the business must not exceed 500 persons) as part of its efforts to assist with the rebuilding the coal industry. The loans are available to any business providing work for miners.

Recipients can receive funds for a 5-year period (only 6-12 months for circulating capital). The assets of the potential recipient must be at least 200% of the value of the potential loan and the applicant must be insured for the duration of the loan. Seven banks service this back-up line: “Aval”, “Privatbank”, Nadra”, Vabank”, Energobank”, “Finansy ta Credit”, and “Ukrainian Credit Bank”.

THE “ EURASIA ” FUND.

The Eurasia Fund provides loans to small privately-owned enterprises with a maximum of 100 employees. The main requirement of the loan is that the applicant work in production or human services. An enterprise may only receive a loan for planned capital investment (to buy equipment, to buy new real estate or to renovate a current real estate holding) or replenish circulating assets. The loan can be for a maximum of three years and $100,000. “Azhio,” “VABank” and others service this back-up line. Those willing to receive the credit must operate in either Kiev, the Kiev region, or the L’viv region, must have a project aimed at developing a company rather than managing temporary financial hardships, and must also invest their own money in the project.

BUSINESS CENTERS AND CHARITIES

Business-centers render a wide range of services, but rarely provide loans. (although sometimes they act as guarantors for purchases of assets) The major kind of assistance provided by business centers is consulting, for example, in finding the right bank or insurance company. They can also provide intellectual “know-how” to help companies get credit speedily and on advantageous terms. Loans provided through charity funds may be considered kind of proto-non-pledge loans program. However, for the present these kinds of deals are of questionable legality.

CREDIT UNIONS

Credit unions are only expected to take off if a legal non-pledge micro-lending system is created. Since no such systemis planned, non-bank lending is currently developing very slowly. For the most part, credit unions devote only a small part of their attention to business projects: of all loans they issue, entrepreneurs receive only 30-40%. 

For entrepreneurs seeking short-term credit (for several months or a year) on the fly, credit unions are good alternatives to banks. The advantages of using credit unions are: First, they are generally more open than banks because they operate on a voluntary basis. Each union member has the legal right to influence how the union operates. Second, the experience of working outside bank protocols can increase the borrowing sophistication of a small businessperson. Third, credit unions usually demand lower year-length interest rates than banks.

Ukrainian credit unions have been growing in strength each year. Even if a union provides a lone at the same yearly interest rate as a bank, financiers usually advise potential borrowers to choose the credit union. This is because receiving a bank loan at a 30% interest rate does not mean an enterprise will pay only the loan amount plus 30%. Other costs can increase the cost of the loan, including  insurance on the pledge and registration at a notary.

It is almost impossible for new entrepreneurs living in the provinces to find micro loans. (loans for no more than several thousands hryven) For these businesspeople in particular, credit unions are indispensable: they can provide easy, fast and advantageous terms on starting capital. For example, a small farmer looking for a loan big enough to buy several tons of fertilizer has no other choices but go to a credit union. On average, unions establish yearlong interest rates of 20-40%. In big cities, some credit unions provide larger loans at considerably higher yearlong interest rates. A crediting rate of 50% a year might seem outrageous, but, at the very least, if a company repays a loan before the end of the year, the interest charged with decrease in line. Crediting rates also depend on the financial situation at the credit union– the more assets, the lower the rate.

WHAT’S GOING ON AT THE STATE COMMITTEE ON ENTREPRENEURISM?

    The State Committee on Regulatory Policy and Business Undertakings (SC) has recently been given a new manager. Despite analyst expectation and three authoritative parliamentary proposals, Alexandra Kuzhel’ was not made the new manager. (it is widely believed that Kuzhel’ suffered from infighting within his party, Trudova Ukrayina) Instead the position was given to Yuri Aksentiev, former SC Vice President and State Board member.

Aksentiev has already declared that he thinks the primary objective of the committee should be to “establish and secure a balanced correlation between business and power, maximum effective implementation of the law on regulatory policy, and intensification of the committee’s regional-oriented work”. In his opinion, the utmost attention of the SC should focused on the “appropriate inclusion of small businesspeople into a simplified pensionary system.” It may be somewhat surprising, then that the majority of business people have allowed Aksentiev’s promotion to go unnoticed.

In order to make use of its potential, Ukraine must take certain steps. It’s worth noting that in most all of the successful economies in the EU, citizens start small business by first investing their own family capital. In the late 80-90s, 89bn rubles were taken out of accounts in Ukrainian “Oshchadbank”. That sum of money would have been sufficient to develop small business to a European level. Instead, small business began growing at a time when citizens and their families were desperately short of capital. This shortage of capital, when combined with the actions of some  local authorities, dictated the speed at which small businesses would grow.

Today, most businesspeople working out of the home are not aware of current legislation and know little about what the Cabinet and Parliament are doing. In this connection it’s worth to mention that one of the biggest problem of Ukrainian business today is the absence of professional management. However, scores of our academies continue to graduate the unemployed whose occupations were in no demand 20 years ago already.