SMEs are Strongly Dependent on Bank Financing

SMEs have appeared on the “needles” of banks today


“Most of Armenia’s small and medium-sized enterprises, particularly industry-led businesses, face serious challenges. The financial leverage is in a rather risky area, the potential for internal growth for development is very low, and all the collateral capacities have been exhausted to attract additional credit resources, “said Karen Martirosyan the head of strategic management department of “Avenue Consulting Group” LLC.  According to K. Martirosyan, SMEs have appeared on the “needles” of banks, thereby limiting their development opportunities.

“If they want to show growth rates, they should either increase their growth rate or their internal resources, which suggests that the profits gained from the previous year’s operations be reinvested in that business or should be used by various external funding sources. Over time, using different external funding resources, today, facing a fact, the financial leverage is in the risky area. In other words, the business is financed mostly at the expense of liabilities. In the meantime, local commercial banks or other financial institutions have pledged all their property for business development loans and face additional financial difficulties for future development projects. As a result, it does not even have the opportunity to expect extra funding from commercial banks to ensure the working capital. Finally, in order to mitigate the situation, one bank is moved to another with the expectation of improving loan conditions: interest rates reduction, prolongation of the loan repayment period, obtaining a grace period, etc. ”

The expert finds that this problem is, in particular, due to the lack of alternative resources for financial resources.

“For example, our SMEs are not ready for entry into the bond market, there are no serious resources today, which will be included in SME development programs, with limited resources, with special financial structures. In other words, a situation has emerged which puts the development of small and medium-sized businesses and if that continues, we will lose that opportunity in the next five years because they hardly serve their loans. waiting for loans to start and just start another development project. And since most of our economy is based on SMEs, today’s economic growth is expected, especially in the industry, less realistic. Alternatives to the solution of this problem should be sought … ”

Source: aravot.am