Financing SMEs and Entrepreneurs 2020

28. Lithuania

Key facts on SME financing

SMEs account for 99.6% of all enterprises operating in Lithuania, the majority of them (81.9%) being micro-enterprises. Most SMEs (80.4%) have chosen the legal form of private limited liability company and are primarily engaged in wholesale or retail trade activities (almost a third of all SMEs).

Equity capital and credits issued by non-banks (e.g. trade payables) are the main sources of funding for SMEs. As of 2017, equity capital financed almost half of SMEs’ assets, while slightly more than a third of assets were acquired through non-bank credits. Nevertheless, banks play an important role in financing SMEs. As of 2017, almost 13% of all SME assets were financed via bank loans.

Although SMEs account for the vast majority of enterprises and create almost 70% of gross value added, their share of total business loans remains considerably smaller. By the end of 2018, this share amounted to 40% of the total portfolio of loans to non-financial enterprises. Furthermore, even though outstanding SME loans have been growing (+ 23% and + 5 % over 2014-18 and 2018 respectively), their share in the total portfolio of loans to non-financial enterprises has barely changed over the years.

Previously, SMEs rarely used alternative sources of financing in Lithuania. However, when banks started to tighten funding conditions in 2018 and 2019, the need for such sources significantly increased. The survey of non-financial enterprises conducted by the Bank of Lithuania in H1 2019 indicates that 35% of micro-enterprises need alternative sources of financing (e.g. crowd funding, business angels, equity funds), i.e. 10 percentage points more than six month ago. Regardless of this figure, a very small share of these enterprises are using such sources. For example, while there are clear legal regulations for crowdfunding in Lithuania and a significant number of enterprises providing such services, surveys show crowdfunding was actively used by only 1.2% of the surveyed micro-enterprises. Nevertheless, the popularity of alternative financing sources is increasing. For example, in 2018 new loans issued by crowd funding platforms contained EUR 8.54 million (EUR 1.29 million in 2017) while new loans issued by MFIs declined (see Table 28.1).

The government supports SMEs by ensuring that they benefit from favourable conditions to obtain the necessary financing to start a business. Loans with preferential rates are granted under the EU Entrepreneurship Promotion Fund over the 2014-20 period. SMEs may also get loans with preferential rates from the Venture Capital Fund II. Moreover, when a company does not have sufficient collateral, it may apply to the state-controlled enterprise UAB Investicijų ir verslo garantijos (Investment and business guarantees, INVEGA), which provides a guarantee of loan repayment. In addition, municipalities provide significant support to SMEs: when starting business, small enterprises may expect their set-up costs, part of interest payments and other expenses to be compensated.

Table 28.1. Scoreboard for Lithuania

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	EUR million	..	..	..	..	..	..	..	3 143	3 231	3 404	3 723	3 920
Outstanding business loans, total	EUR million	8 409	9 864	7 978	6 816	6 906	7 047	6 828	7 404	7 740	8 611	9 252	9 700
Share of SME outstanding loans	% of total outstanding business loans	..	..	..	..	..	..	..	42.45	41.74	39.53	40.24	40.41
New business lending, total	EUR million	7 759	9 452	7 252	4 868	3 792	3 220	3 236	3 128	4 275	4 248	4 639	4 028
Government giuaranteed loans, SMEs	EUR million									148.4	218.8	241.6
Non-performing loans, total (NFCs)	% of all business loans	..	..	..	..	..	..	..	10.31	8.39	6.25	5.04	4.05
Non-performing loans, SMEs	% of all SME loans	..	..	..	..	..	..	..	17.54	14.11	11.18	8.59	6.60
Interest rate, SMEs	%	6.61	6.33	4.70	4.55	4.97	3.35	3.47	3.19	2.97	2.96	2.79	3.52
Interest rate, large firms	%	6.04	5.76	4.26	4.35	4.44	3.27	2.86	1.65	2.03	2.27	2.07	3.07
Interest rate spread	% points	0.57	0.57	0.44	0.20	0.53	0.08	0.61	1.54	0.94	0.69	0.72	0.45
Colalteral, SMEs	% of SMEs needing collateral to obtain bank lending							76.20	70.40	67.10	71.70	79.10	73.10
Rejection rate	1-(SME loans authorised/ requested)	..	..	..	19.1	15.6	19.0	10.2	22.8	8.6	10.5	15.6	27.0
Non-bank finance
Leasing and hire purchases	EUR million	..	..	..	1 756	1 547	1 452	1 527	1 521	1 660	2 111	2 463	2 880
Factoring and invoice discounting	EUR million	..	..	..	151	200	231	348	359	407	434	517	464
Other indicators
Payment delays, B2B	Number of days	..	..	..	..	..	..	..	..	..	26	27	30
Bankruptcies, SMEs	Number	606	954	1 842	1 637	1 272	1 401	1 552	1 685	1 983	2 732	2 970	2 090
Bankruptcies, SMEs (growth rate)	%, Year-on-year growth rate	..	57.43	93.08	-11.13	-22.30	10.14	10,78	8.57	17.69	37.77	8.71	–29.63

Source: See Table 28.4.

SMEs in the national economy

SMEs account for a significant part of all enterprises operating in Lithuania. According to Statistics Lithuania, 84 510 SMEs operated in Lithuania at the beginning of 2019, which accounts for 99.6% 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 (82%). Over 2008-18, the number of micro-enterprises increased by 42.2% and their share among all SMEs grew by 7.3 percentage points.

SMEs are a significant contributor to the domestic economy, creating almost 70% of gross value added and contributing to 59% of domestic exports of goods. In early 2019, SMEs employed about 694 000 employees, i.e. 73.3% of all persons employed in Lithuania. SMEs are characterised by a large concentration of enterprises and employees in the trade sector. Slightly more than a fourth of all SMEs operate in the trade sector, whereas the share of employees’ accounts for almost a fifth of all SME employees. The transport sector is also large, as SMEs in this sector employ about 8% of the total workforce. The share of other economic branches is much smaller. SMEs are playing an increasingly greater role in investments as well. In 2017, SMEs’ investments amounted to 71.1% of all tangible investments among enterprises, i.e. 5 percentage points more than five years earlier.

Table 28.2. Distribution of firms in Lithuania, 2018

Class size	Number of enterprises	% Share
Micro	69 223	81.5
Small	12 853	15.1
Medium	2 434	2.9
Large	380	0.5

Source: Statistics Lithuania.

SME lending

The level of indebtedness of SMEs operating in Lithuania is not high. As of 2017, the ratio of SMEs liabilities to assets amounted to 51%. The inclination of SMEs to finance their activities through their own funds is also confirmed by survey results. For example, according to the survey of non-financial enterprises conducted by the Bank of Lithuania in H1 2019, about 65% of all enterprises stated that they were using internal resources as their main source of funding. It is likely that such trends are mainly determined by a higher SME credit risk, which results in less lending opportunities for SMEs compared to large enterprises. On the other hand, the level of indebtedness level for large enterprises is not high either, so it may be assumed that the phenomenon is also due to a conservative approach of Lithuanian entrepreneurs, i.e. a general unwillingness to borrow to fund business activities.

As for external sources of funding, SMEs most frequently choose trade payables, EU support and other non-bank sources to finance their activities. By the end of 2017, bank loans accounted for only 12.7% of all SME liabilities. Nevertheless, lending to SMEs plays an important role for banks operating in Lithuania. By the end of 2018, loans given to SMEs accounted for 42.8% of the total portfolio of loans to non-financial enterprises. Moreover, lending to SMEs has been growing rapidly in recent years. For example, the portfolio of loans issued to this segment increased by 21.3% over 2015-18 (5.3% in 2018). This growth was mainly driven by the recovering demand, increasing investments and improved business expectations about future prospects (especially in the trade sector, which accounts for a significant share of all SMEs). Favourable lending conditions (e.g. interest rates remaining relatively low1) also contributed to this increase. It is expected that these trends will continue. However, the growth rate will be lower due to rising interest rates, tightening lending standards and a slowing growth of the economy. The Bank of Lithuania projects that GDP, investments and wages should pick up in 2019 by 2.7%, 5.3% and 8.1%, respectively.

Credit conditions

Even though interest rates remain relatively low, nearly a half of SMEs surveyed by the Bank of Lithuania 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 2.76% in 2018 and increased by 0.20 percentage points over the last three years, while the price of small loans (< EUR 1 million) increased to 3.29% (+ 0.17 percentage points)2. The results of the survey of enterprises conducted by the Bank of Lithuania in H1 2019 showed that 54.5% of micro and 50.9% of small enterprises were not satisfied with credit conditions (in H1 2017, 37.3% and 37.5% respectively). The number of applications rejected by credit institutions has been increasing as well. About 61% of micro and 29% 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 H1 2018, 40% and 29%, respectively). A third of the surveyed enterprises stated that the main reason for the rejection of their application was their weak financial conditions. The increasing share of enterprises that have backed their liabilities by pledge of assets (guarantees) also shows that risk assessment has become more rigorous. There were 71.2% of such micro enterprises in H1 2019, while in H1 2017 this share contained 62.3% respectively. This is also driven by the fact that an increasingly larger share of enterprises with higher credit risk are becoming more confident in applying for bank loans due to an improving economic situation and rapidly recovering investments. Meanwhile, banks continue to carefully assess the enterprises’ business prospects and are not lowering credit standards. In addition, credit supply decreased to the higher concentration in the banking market.

The survey of commercial banks operating in Lithuania which was conducted at the end of 2018 showed that the majority of banks curbed lending to SMEs. In addition, the survey revealed more banks restricted lending to certain branches of the economy (e.g. transportation, real estate). Credit terms and conditions have been tightened mainly due to bank capital reasons and changes in risk assessment standards, including expectations related to the overall economic situation, industry or firm-specific outlook, or collateral risk.

Alternative sources of SME financing

SMEs operating in Lithuania mainly tend to use traditional funding measures, i.e. own funds, trade credits, bank loans and financial leasing. Similar trends are observed with regard to large enterprises. Although survey results show that about a third of micro-enterprises experience a need for alternative funding sources, most of them do not use such sources. For example, only 1.2% of micro-enterprises stated that they use crowdfunding. Government support and EU structural funds were used more often (8.8% and 14.7% of surveyed firms, respectively). Private equity funds do not have a significant impact on the structure of SME financing. It the end of 2018, the investments of these funds contained 0.03% of GDP, while European average is close to 0.47%.

Other indicators

Compared to large enterprises, the SME segment is characterised by a relatively higher credit risk. For example, bankruptcy proceedings were initiated for almost 2 000 enterprises in 2018, and all of them were SMEs, –29% from 2017. On the other hand, such changes were determined not by improving financial condition of enterprises but rather by legislative amendments, which facilitated bankruptcy proceedings for enterprises that had not been engaged in activities for a long time, but had financial liabilities. As a result, the number of bankruptcies increased by 51% during 2015–2017. This is why bankruptcies started to decline significantly in 2018.

The higher SME risk is also illustrated by non-performing loan portfolios in banks. At the end of 2018, the share of non-performing loans granted to SMEs amounted to 6.6%, while the total non-performing loan portfolio amounted to only 2.6% (4.1% for non-financial enterprises). Loans issued to enterprises engaged in accommodation, catering, construction and real estate activities accounted for the largest share of non-performing loans. However, in spite of higher risk, the overall share of non-performing loans issued to SMEs is decreasing (mainly due to the reduction of loans that originated in the crisis). In 2015-2018, the portfolio of these loans shrank by 44%, while its share in total SMEs loan portfolio contracted by 8 percentage points.

Government policy response

Loan instruments

Entrepreneurship Promotion Fund 2014–2020

This instrument is aimed at entrepreneurs wanting to start 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%. Having used this instrument, entrepreneurs and enterprises can additionally use the Business Start-up Subsidies, a compensation programme, and partially compensate their labour costs. The instrument is financed by the European Social Fund (ESF2), and loans are given by credit unions operating in the country.

Open Credit Fund 2 (OCF2)

This programme offers loans to SMEs that are starting or developing a business, with favourable interest rates (for investment and working capital). The maximum loan amount is EUR 600 000, provided that a credit institution adds to the project being implemented no less than 25% of own funds. In total, up to EUR 37.7 million of domestic funds are earmarked for the implementation of this programme. Such loans are issued by a few small banks operating in the country.

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 74.07 million is earmarked for this measure. Loans under this measure are issued by two commercial banks operating in the country.

Crowdfunding loans Avietė

These loans enable SMEs to borrow through crowdfunding platforms. The total amount earmarked for financing of Avietė loans is EUR 4.615 million 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 Avietė loans, will select those business projects which will be co-funded under Avietė.

Guarantee instruments

INVEGA, a state-established enterprise, provides individual and portfolio guarantees.

Individual guarantees. 

This instrument guarantees to the credit institution the repayment of the first part of the loan, which may be from 30% to 80% of the entire amount, while the remaining part shall be covered by security deposits from the loan recipient. This guarantee may be used by entrepreneurs, SMEs and large enterprises. For an enterprise operating since less than 3 years, the maximum amount of the guarantee is EUR 579 240, and EUR 1 448 100 for older companies. This service is provided by banks and credit unions, which have entered into cooperation agreements with INVEGA. Guarantees are provided not only for loans but also for financial lease and export credits. The maximum amount of guarantees for one exporter is EUR 1 000 000.

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 institution3. 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 venture capital instruments through six venture capital funds. Other venture capital instruments are still under development, and do not provide investment services yet.

Table 28.3. Venture capital funds in Lithuania

Fund	Size, mln. EUR	Source	Status
Baltic innovation fund	130.00	INVEGA	Active
Co-investment fund	11.00	INVEGA	Active
Co-investment fund II	9.28	European Regional Development Fund	Active
Co-investment fund RDI	4.00	European Regional Development Fund	Active
C-investment fund for transportation	4.00	Cohesion Fund	Active
Acceleration funds	13.47	European Regional Development	In progress
Venture capital fund I	13.80	INVEGA	Active
Venture capital fund II	13.76	European Regional Development Fund	Active
Business angels co-investment fund	10.23	European Regional Development Fund	Active
Development fund I	14.51	European Regional Development Fund	Active
Development fund II	16.18	European Regional Development Fund	In progress

Source: INVEGA.

Compensation measures

Financing of loan interest

Under this instrument, enterprises are subject to partial compensation of interest for funds borrowed. From 50% to 95% of the interest actually paid can be compensated for up to 36 months. Enterprises involved in industrial activities can be compensated for up to 100% of the interest actually paid.

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.

Employee training compensation (postponed in 2018)

Under this instrument, a SME may be compensated up to 80% of its employee training costs. The compensation may not exceed EUR 4 500 for one enterprise.

Figure 28.1. Trends in SME and entrepreneurship finance in Lithuania

Source: See Table 28.4.

Statlink

Table 28.4. Source and definition for Lithuania’s Scoreboard

Indicator	Definition		Source
Debt
Outstanding business loans, SMEs	Total outstanding loans to domestic NFCs (SME)	Bank of Lithuania
Outstanding business loans, total	Total outstanding loans to domestic NFCs	Bank of Lithuania
Share of SME outstanding loans	Calculation
New business lending, total	New business of euro-denominated loans granted by Lithuanian MFIs (banks, foreign bank branches and credit unions) to euro area non-financial corporations. New business covers financial contracts that specify for the first time loan, and renegotiations of existing loan contracts. New business does not cover revolving loans and overdrafts, as well as credit card debt. Data on pure loans is available here.	Bank of Lithuania
Non-performing loans, total (NFCs)	90 days past-due (material exposure) or unlikely to be repaid in full without collateral realisation (irrespective of any past-due amount or of the number of days past-due), or impaired or defaulted according to applicable accounting or regulatory frameworks.	European Banking Authority
Non-performing loans, SMEs	90 days past-due (material exposure) or unlikely to be repaid in full without collateral realisation (irrespective of any past-due amount or of the number of days past-due), or impaired or defaulted according to applicable accounting or regulatory frameworks (SME's).	European Banking Authority
Rejection rate	Number of rejected applications / Total number of applications	Review of the Survey of Enterprises, Bank of Lithuania
Non-bank finance
Leasing and hire purchases	Financial leasing is a loan for the purchase of equipment meant for long-term use and similar fixed assets, if the lessor leases such fixed assets to the lessee for a fee that covers payments of the loan principal and interest. At the end of the lease period the right of ownership transfer to the lessee. Data covers resident non-financial corporations leasing.	Association of Lithuanian Banks
Factoring and invoice discounting	Factoring is a loan for financing the working capital of an enterprise or financial institution, whereby the factoring company acquires accounts receivable (claims) of such enterprise or financial institution by taking over the enterprise's or financial institution's right of claim on receivers of goods or services and assuming credit risk. Data covers total portfolio of factoring and invoicing.	Association of Lithuanian Banks
Other indicators
Payment delays, B2B	Average time for actual payment - average payment terms allowed to customers	Intrum Justitia – European Payment Report
Bankruptcies, SMEs	Number of bankruptcy processes instituted in the corresponding year.	Lithuanian Statistics Department
Bankruptcies, SMEs (growth rate)	Own calculations	..

References

Lithuanian statistics department - https://www.stat.gov.lt

Bank of Lithunia – www.lbank.lt

INVEGA – www.invega.lt

Invest Europe - www.investeurope.eu

Intrum Justitia - www.intrum.com

Notes

← 1.  Currently, interest rates to SMEs are increasing significantly.

← 2.  12-month average.

← 3.  It is a guarantee to credit institution that up to 80 % of the principal amount of loan will be covered in case of default.