Lending thaws for small businesses

The Czech Republic is one of the leading countries in Europe in terms of the number of self-employed and the amount of small- to midsize enterprises (SMEs). Some statistics show it to be the leading country - and by a wide margin. For every 1,000 inhabitants in the Czech Republic, there are 86 SMEs, according to the European Commission, more than double the EU average of 40.

The importance of SMEs in a growing economy is undeniable. While countries can rely on foreign investment to get started, eventually FDI becomes saturated as foreign companies find cheaper markets farther out and countries have to rely more and more on their own domestic economy.

"SMEs are the backbone of every economy, and they are a job engine. You support them, and you're doing a good thing for the whole country," said Česká spořitelna CEO Gernot Mittendorfer in an Oct. 14 interview with The Prague Post.

But all SMEs need initial support, in the form of information and more importantly, capital. Lending was unfortunately one of the first financial activities to freeze up when the world economic crisis hit in 2008, and the Czech Republic was no exception, Mittendorfer said. Over the past two years, companies have had to use the downturn as a time to downsize and streamline, but in moving forward, he believes, lending will begin to pick up again soon.

This year has already begun to produce positive data that shows lending and new business formation is recovering. In the first half of 2010, 12,644 new companies were established in the Czech Republic, up 10 percent from the same period last year, according to the Czech Capital Information Agency (CEKIA). Nearly half of those companies were formed in Prague.

"If the setting up of new businesses maintains its pace also in the second half of the year, 2010 could become the most successful year in the eight-year history during which CEKIA has been monitoring these statistics," CEKIA analyst Petra Štěpánová told the Czech News Agency.

"Interest in running one's own business is growing again in the Czech Republic owing to the fragile recovery of the domestic economy as well as rather high unemployment, when people who had lost jobs started to set up their own companies," she added.

Only 4.6 percent of those companies were joint-stock, a share that has been falling over the past several years as limited-liability companies (LLCs) have gained in popularity. LLCs made up 95.4 percent of new businesses in H1, while the overall share of LLCs in the current database maintained by CEKIA is 92.9 percent.

"It is obvious that the importance of SMEs for the Czech economy will grow," she said.

One surprising aspect of the growing wave of SMEs is the increased role some hope will be played by female entrepreneurs.

GE Money bank announced Oct. 19 a new initiative to boost the number of female entrepreneurs in the country. Seventy-one percent of women are afraid of failure and what they perceive as too many and too large risks associated with starting a business, a survey for the bank by STEM/MARK found. Currently, women own 4 percent of private firms, and female entrepreneurs comprise 11 percent of all inhabitants in the Czech Republic. The survey also found that 40 percent of Czech women would start doing business if they knew where to turn for information.

On an EU level, lending trends continue to be rocky as banks still face their own liquidity and debt management issues. A European Central Bank survey found 11 percent of banks reported a tightening of credit standards in the second quarter of 2010, up from 3 percent which reported the same in the first quarter.

Looking forward, euro area banks anticipate credit standards on loans to enterprises to tighten somewhat in the third quarter of 2010, by 5 percent," the survey read. "The factors contributing to the reinforced net tightening of loans to enterprises relate to the deterioration of banks' own balance sheet situation, particularly as regards their liquidity position and access to wholesale funding."

The EU remains committed to promoting SMEs across the union, however, with several programs and dedicated funding. The Financial Instruments of the Competitiveness and Innovation Programme (CIP) expects to help 400,000 small businesses by 2013, and the European Regional Development Fund (ERDF) will have dedicated 23 billion euros for helping small businesses by the same period.

The European Investment Bank nearly doubled its lending for small businesses for the 2008-11 period with dedicated funding that amounts to 30 billion euros.

Accessing this funding isn't always straightforward, however, and most if not all SMEs rely on banks or firms to help them draw up proposals to get funding. To this end, Česká spořitelna has an EU program business product that helps companies create the right structure of financing in order to apply for EU funds and provides EU advisory services.

Claire Compton can be reached at
ccompton@praguepost.com