Starting a small business can give a budding entrepreneur major headaches, especially when it comes to putting together the initial capital. What does a newly minted businessperson need to know and who can he or she to turn for help? In this week’s issue, The Leader examines the trials and tribulations of trying to get a small-business bank loan in Russia.
Many Russians dream of starting their own businesses, and experts say there is a deficit of entrepreneurs in the country. But unfortunately, finding the funds can be a serious problem for beginners.
You have spent sleepless nights thinking your business idea over; discussed it with your friends, colleagues and family. What next?
“When a person wants to start his own business, the first thing to do is to have a product or a service that is cheaper and better quality than what already exists on the market,” said Veniamin Kaganov, director of the Institute of Entrepreneurship and Investment. According to him, once a person has a definite original idea, he can proceed to the next stage and determine his business’ status. “It can be a small business, like a limited liability company, or a sole proprietary private business, or one can register as an entrepreneur without a juridical person — all these forms are written down in law,” he explained.
When it comes to buying equipment and leasing premises, the main problem is funds, and, if you are not a rich heir, you will need to take out loans. “There is no lack of money; the banks have plenty,” Kaganov said, “But they are not eager to give it to beginners, as there is no guarantee that they will get the money back.”
The possibility of getting a loan from a foreign bank is fairly low. For example, a senior specialist in the credit department of the representative office of Turkish bank Yapi Ve Kredi Bankasi A.S. said. “We do not work with underdeveloped or venture companies, because we know how easily you can arrange documents here,” he explained, “You can create anything today and disappear the next day.”
The European Bank of Resources and Development (EBRD) say they naturally also need to be cautious in giving loans. “We generally do not engage in startup financing unless the client has already had his business running at least three months, and, in the case of a business in service or production, for at least six months,” said Bryan Nielsen, Program Coordinator at the Russia Small Business Fund (RSBF), a EBRD-sponsored program.
Olga Bodnarchuk, chief of the credit department at Small Business Credit Bank (SBCB)’s Moscow office, one of the partner banks of the EBRD-launched fund, said: “If we do credit a starting business, we do it only in cases where the entrepreneur is ready to invest 30 percent himself — otherwise he will have nothing to lose, and we will be at risk.”
If a business has already been on the rails for a while, Nielsen said he sees no reason to refuse a loan: “From our experience we know that giving loans to small businesses is not risky at all, if you have the proper credit technology.” He said the procedure is that the EBRD provides loans for its partner banks, and helps them establish a credit department and hire loan officers. “We also provide training and give advice for the whole credit cycle,” he added.
While most banks admit that beginners don’t have much of a chance of getting a loan from them, the SBCB is proud to offer possibilities for the poorest businessmen: “When people come to us and say that they have nothing to put down as a deposit, we agree to even consider the equipment they are working on,” Bodnarchuk said. “In accordance with the Central Bank’s directives, we must always make sure the client provides some collateral,” she added.
The best collateral, Moscow bank managers say, is real estate in the capital. Insisting on liquidity, Sodbusinessbank also accepts securities like shares and promissory notes. And Nielsen of the RSBF said that, for the Fund’s partner banks, collateral can be anything: from private property to household goods — a refrigerator, for instance. “We are pretty flexible. Once we even accepted 100 geese as collateral,” he added.
The business’ paperwork must also be laid out. Kirill Shaikov of Sodbusinessbank described the process: “We put a company’s balance sheet through a machine, and it makes a recommendation about the company’s ability to pay the loan back. We base our decision as to whether or not to lend money upon this.”
Nielsen said the Fund demands that its partner banks always examine the actual premises of a business: “We want to see the management abilities of our client, how the business runs, that he has a regular income, that he is responsible, for instance, if he pays his suppliers and his employees on time,” he explained.
If satisfied with the result of a visit, the Moscow branch of the SBCB usually decides positively in about 80 percent of the cases, according to Bodnarchuk. “We do not offer loans to the remaining 20 percent either because of their financial situation or because they themselves refuse if they are not satisfied with the terms we set or the sum we agree to lend,” she added.
Kaganov said that the conditions the banks offer are generally very tough. Viktor Yermakov, the head of the Russian Agency of Small and Medium Business Support, adds that Russian businesspeople “have very little access to cheap credit resources.”
“When one comes to a bank, it offers him a small amount for a month, and what one needs is a lot of money for longer periods.” But the banks reluctancy is justified, he added, because the risks are colossal. “The slightest mistake in management can lead to a failure.”
“When changes for the worse happen, clients ask us to sell their collateral property,” added Bodnarchuk. “But we understand that anybody can have force majeur circumstances, for example, when one of our debtors died, and the wife couldn’t repay the loan on time, we prolonged the due date for repayment.”
Some entrepreneurs prefer to rely on their own savings to launch their businesses, preferring their financial independence to extra money in their pocket. One such businessman is Vladimir Lishbergov, who founded a videotape-production company in 1995. He said he felt strongly that a bank loan is like “a ball and chain”. “We have never [taken out a bank loan], because you can never be sure how the business goes,” he said. “The rate of interest [adds to the sum of the loan,] the very next day, and it is constant stress for the accountant, so we decided from the very beginning not to borrow any money either from the banks or from the state,” he added.
Small businesses are often family-based and, if the sum needed for a start-up is less than $1,000, banks advise entrepreneurs to invest their family budget or borrow from friends. “Starting on one’s own with a business that does not demand much in the way of funds and saving up the initial capital is actually possible,” Kaganov said. In this case, a potential borrower will be considered trustworthy if and when he or she decides to apply for a loan later.
“If you take out a loan and pay it back on time, this will be the first good mark in your credit history, and the longer this history is, the more opportunities you will have in the future,” Kaganov added. “It is a pleasure to see clients grow and succeed with our help,” Bodnarchuk of SBCB said.