Financial support and new solutions for businesses suffering from the coronavirus
Business conditions that have changed during the quarantine had a painful effect on the financial flows of many Lithuanian enterprises. Accordingly, the State took urgent measures to help them survive. About 1.3 billion euros are planned to be allocated from the planned Government package of financial instruments to Lithuanian business entities. Experts say that support and preferences will be provided to small, medium-sized and large businesses. The aim is not only to maintain the liquidity of enterprises, reduce the tax burden, but also to encourage them to reorient their activities.
Daina Kleponė, the Managing Director of the Public Institution “Enterprise Lithuania”, the Agency established to promote entrepreneurship and foster export, says that immediately, after the country was put under quarantine, the Agency started receiving questions from customers as to whether the State will help their businesses because the economy stagnates, businesses face extreme sluggishness, partners and suppliers no longer fulfill their obligations. “The query as to “how and when state support will be available”, “what criteria must be met” is probably the most popular of all queries that our consultants receive on a daily basis. Threats of the coronavirus on the business caused a lot of stress and uncertainty.
For this reason, the package of financial instruments announced by the Government, is like a life-saving raft for them, and businesses want to take advantage of it as soon as possible“, – D. Kleponė presents the situation of Lithuanian business.
Wide range of the package of instruments
About 1.3 billion euros will be allocated from the planned Government package of financial instruments to Lithuanian business entities under the instruments of UAB “Investicijų ir verslo garantijos“ (INVEGA). 851 million euros will be granted for guarantees, for loans – 287 million euros, of the 50 million euros for soft loans to ensure liquidity in those sectors where a business has been hit hardest by the coronavirus. It is also planned to grant 145 million euros for venture capital investments, 23 million euros – for interest compensation.
“Everything is changing very fast and the Government is trying to respond to the current situation as quickly as possible. The authorities are aimed at ensuring business liquidity, a great deal of attention is also paid to encouraging enterprises to expand, to change the direction of their activities and respond to current market needs. New ‘injections’ are very important for the economy. Therefore, more than 60 percent of the amount from INVEGA guarantees are planned to be granted for new loans. Banks that will provide portfolio guarantee instruments will have to dedicate at least 20 percent of their portfolio for new ideas – new loans“, – emphasizes Jekaterina Rojaka, the Vice-Minister of the Economy and Innovation.
According to her, the instruments are starting to work one after another – deferral and compensation of interest will start as early as next week, all instruments will have to be fully available for a business no later than from the middle of April.
Instruments that are most awaited by small and medium-sized business
Daiva Čibirienė, the President of Lithuanian Association of Accountants and Auditors, notes that, in most cases, the necessary costs are a particularly sensitive issue for small and medium-sized businesses. “Businesses do not receive working capital, their activities are stopping, and costs need to be covered anyway. They have to pay rent as well as wages to employees. Although the State compensates part of the downtime, the other part has to be paid by the business itself. Sometimes even small amounts become a painful burden”, – says she.
The Vice-Minister of the Economy and Innovation notes that in this case, soft loans may become a salvation. “The business must do the following: the enterprise must apply to a state-approved financial institution (list of institutions has not yet been published), that will calculate how much money the enterprise needs for necessary costs per month and will pay out the amount established. In the event that the quarantine will be extended, all procedures will have to be repeated. Financial institutions will grant loans from the state funds”, – presents J. Rojaka.
According to her, interest compensation is another instrument which should significantly change the situation of small and medium-sized businesses that have loan liabilities. This would apply to all loans, even leases, in all financial institutions, once it will be assessed that the enterprise is unable to meet its obligations. The State would bear this burden and would compensate interest.
New solutions for the management of risks
Although the number of intermediary financial partners is being expanded (banks, leasing companies, credit unions and other institutions can become such partners), the Bank of Lithuania anticipates the risk that these financial institutions will be very busy in the current period with the restructuring of existing loans, and, therefore, will not have human resources for crediting businesses, especially those that previously had no financial liabilities with them.
“We gave the banks a chance to increase lending. However, we cannot force them to lend to enterprises suffering from the coronavirus that have no debt obligations, but that currently need a loan. Therefore, the Bank of Lithuania offers two additional solutions which have already been approved by the Government this Wednesday – financing the accounts of this group of enterprises and the establishment of a special fund“, – Jokūbas Markevičius, the Director of the Financial Stability Department at the Bank of Lithuania, states the proposals.
According to the Expert, some enterprises now cannot develop their activities because their business partners are suffering greatly from the prevailing situation and cannot pay accounts. This creates business-to-business indebtedness chain. The said financing of accounts would work through INVEGA: an enterprise should submit an application about unpaid accounts, and this way it could get a direct loan to pay them. According to J. Markevičius, an amount of 50 million euros has been granted for this additional instrument.
A Business Support Fund, which is another proposed solution, will be targeted at large and medium-sized enterprises, which are of strategic importance for Lithuania but cannot receive financing from banks. “Financing from the Fund will be granted under market terms, not under preferential terms. It is planned that the fund will be around 100 million euros. But it could be increased with funds from a private sector or funds of other institutions”, – says the Director of the Financial Stability Department at the Bank of Lithuania.
Tax reliefs that apply to business
Reducing the tax burden is a very important aspect for entrepreneurs facing financial difficulties. The State Tax Inspectorate has prepared measures designed to preserve business liquidity for enterprises that had to restrict or suspend their activities due to the quarantine.
On 20 March, the list of enterprises that directly experienced adverse effects of the coronavirus was compiled. 32 thousand enterprises covering more than 200 different economic activities are listed on this list. Given the observations of business and various associations representing business, another 3 thousand enterprises were included in this list.
“From 16 March, new tax debt recoveries are automatically suspended for the listed enterprises, they are automatically exempt from interest for late payment. Tax loan agreements, which today are concluded under facilitated conditions, without interest, represent another important instrument. An additional possibility of deferring and/or setting out the personal income tax was proposed last week“, – Rasa Virvilienė, the Director of the Legal Department of the STI, presents the measures that facilitate the payment of taxes.
The quarantine, that lasted for three months in Lithuania, not only has stimulated the business to reorient and to pay close attention to e-commerce, but has also changed consumer habits. A poll of Lithuanian population revealed that during the quarantine every fifth person bought more than usual online, and nearly a fifth of the respondents intends to continue buying more online. During this period, the scale of e-commerce in the Baltic States in general has increased by 80%, and consignment flows in Lithuania grew by 54%.
Lithuania lost two positions in the IMD World Competitiveness Index, calculated by the Swiss Institute of International Management and dropped from 29th to 31th place. According to the four groups of criteria for the assessment of countries, Lithuania has significantly improved its position in the field of economic development but has declined in the areas of business efficiency, public sector efficiency and infrastructure assessment.