09/11/2020 7:44 AM

Lithuanian SMEs Vs. COVID-19: Who Wins?

A significant number of economic indicators reveal that COVID-19 has seriously damaged many countries’ economies. SMEs have not managed to escape the economic catastrophe.

It’s therefore important to understand the way in which small companies operating in Lithuania reacted to these challenges and how COVID-19 has impacted their financial health and borrowing opportunities. We’ll also examine future prospects for SMEs.

Most SMEs Felt the Negative Effects of COVID-19 Through Reduced Demand

A recent survey conducted by the Bank of Lithuania revealed that almost two thirds of businesses experienced the negative impact of COVID-19. The issue that appeared to have the biggest impact was the reduced demand for goods and services. Canceled or delayed orders and late customer payments also had a significant impact. According to the survey, almost three-quarters of companies’ profits fell due to these reasons.

However, there were some positive outcomes for SMEs, as companies were satisfied that conditions for business financing hasn’t changed significantly, even during the pandemic. Although half of the SMEs surveyed said that business lending was limited, this had remained almost unchanged from the previous year.

In addition, it’s positive to note that number of rejected loan applications has stabilized. The number of small companies (up to 9 employees) whose loan applications were rejected remains roughly at the same level as a year ago.

Large Equity Helped Companies To Survive Difficult Times

According to Eurostat, in H1 2020, the loan to GDP ratio of Lithuanian companies was 39.4%. This is one of the lowest loan to GDP ratios in the EU, which means that Lithuanian businesses are reluctant to borrow. As a result of their conservative borrowing culture, Lithuanian businesses have accumulated considerable equity reserves.

The majority of companies explained that substantial equity and not being over leveraged has helped them to survive during this critical period. Almost half of the respondents indicated that because of their strong financial position (low indebtedness, large cash reserves, etc.) there was no necessity to apply for government support. Additionally, it’s likely that banks’ deferral of loan repayments also assisted with businesses’ survival.

According to SMEs, Full Recovery Will Take Time

Almost 60% of the SMEs surveyed by the Bank of Lithuania believe that the recovery of their business will take at least one year. This projected recovery time is of course dependent on the extent of the “second wave” of COVID-19.

In the event that the pandemic continues, companies will have to use various comprehensive business continuity measures, including a reduction of operating costs, postponing investments and intensifying expansion efforts into new markets.

Most SMEs do not plan to change funding strategies and internal resources will continue to be the main source of finance.

The primary reasons for such sluggish borrowing according to SMEs are:

  • Sufficient equity
  • Excessive pricing
  • Reluctance of owners to assume additional obligations
  • Fear of losing control of the company’s management

SMEs Are Cautious About The Country's Economic Prospects

Survey results show that the number of SMEs who forecast export growth has fell by almost 20% over the course of the year. Moreover, almost half of the companies that were surveyed expect a decrease in demand. This pessimistic outlook among SMEs has increased significantly – last year this number stood at just 12%. In 2018, about 18% of small businesses planned to increase the number of employees, however, in 2020 this figure has dropped to just 8%.

On the other hand, wage stability is expected. A significant number of companies (41%) do not plan to make changes to wages and stated that future trends will depend on the demand for products and services.

Conclusion

It’s evident that while COVID-19 has created a number of challenges for the Lithuanian SME sector, companies were in a position to survive the period of increased uncertainty without having to rely heavily on external financial support. This is mainly due to companies’ accumulation of equity in addition to the banks’ decision to defer loan repayments during the crisis.

While there is still little optimism in the SME sector at the moment, there are some indications that things are improving. Therefore, we can expect the future to look a bit brighter than it does at present.