10/27/2021 11:41 AM

The post-pandemic status of business entities in Lithuania

Recently, the Bank of Lithuania presented the results of an annual survey of non-financial corporations operating in Lithuania. This survey was conducted with the purpose of analysing companies’ financial health and activity trends, and to assess the demand for financial resources, financing opportunities. The impact of the COVID-19 pandemic and other aspects related to the business development and sustainability were taken into account.

Data suggests that the level of optimism in the business segment remains low as companies expect to be negatively affected by issues including lowered exports, higher inflation and increased labour costs. On the other hand, businesses are encouraged by access to better financing opportunities.

A significant number of business entities are still feeling a decline in demand, but the current situation is more stable compared with pandemic times

Almost half of the survey respondents stated that the demand for their products or services was lower than a year ago. In response, some companies successfully reoriented their activities (17%) or reduced labour and other costs (12%). In addition, they improved liquidity reserves. For example, the share of companies saying that they can operate 3-6 months without external financing increased by 21 p. p. and the share of those that can survive for up to three months almost halved.

However, according to the respondents, a full recovery will take an extended period of time. This opinion was found to be shared mostly by large corporations (67%). Usually, long-term recovery is expected by service providers, while construction companies were much more optimistic.

In addition, about 20% of surveyed entities expected that the number of bankruptcies will increase in the short-term because financial support from the government will come to an end. In case the economic situation deteriorates, companies intend to rely on state aid measures (45%) new markets (13%), cost reduction (11%) or postponed investments (11%).

Internal funds remain the main source of financing

The results of the survey showed that about 40% of companies use internal funds as their main source of financing. This financing strategy is dependent on having sufficient internal resources or the absence of a need to borrow. However, 43% of business entities stated that governmental support became much more important to their activity. That said, only 4% of respondents declared that they are fully dependent on the government.

A significant share of companies also stated that usually, governmental support is required when the company cannot pay its bills, or when customers cannot pay on time. This creates a shortage of working capital and delays plans for development. In that case, financial support from the government is helpful.

Companies are pleased with increased funding alternatives and lower restrictions from lenders

The majority of respondents (55%) indicated that there is no shortage of financing measures, compared with last year when this share was only 24%. Some companies stated, however, that there is a lack of information regarding existing financing measures, and more measures for long-term investments are needed. Generally, this opinion was expressed by SMEs.

The survey also revealed that 60% of companies received loans when fulfilling additional requirements of the lender. This shows that there are no significant barriers to obtaining a loan, however, the majority of entities are of the opinion that lending in Lithuania is totally or partially restricted. In any case, an awareness of the situation is improving, demonstrated by the share of companies believing that lending is constrained declining slightly over the year.

More credit applications are being accepted by lenders

The survey showed that business customers have much better opportunities to borrow than a year ago. For example, the number of rejected applications fell from 33% to 9%. The most significant improvement was noted in the SME segment where the share of rejected applications decreased from 60% to 10%. Small business entities and companies operating in the construction industry were found to be much more acceptable to credit institutions now than in 2020.

The reasons for rejecting applications have changed. An unfavorable macroeconomic environment was the most frequent reason in 2020, while this year the main reasons were: weak financial position of the company (38%), large indebtedness (37%) and insufficient collateral (21%). Moreover, applications for working capital financing had lower chances of being financed than investments.

The survey revealed that no significant changes in the credit market are expected in 2022, therefore, it’s likely the market will experience increased stability and sustainability compared with the previous year.