Why do many Ukrainian companies have problems getting Finance

Talking to medium sized Ukrainian Agricultural business, at least every second company names lack of accessible financing facilities for reasonable rates.

Yes it is true, that either interest rates which local banks do provide for agricultural business are high (currently 18-22 % p.a. for UAH-loans) which consumes most of the potential profit, or terms of financing are too short which puts pressure on the periods in which needed equipment should amortize, or requested pledges are not available.

But this only a limited point of view on the real picture for getting finance.

Out of our practice in consulting medium sized agricultural business we are often still surprised in what bad condition financial figures are maintained. Means, they either do not show the real picture of the current business or they lack of transparency which hinders loan providing banks – even if specialized on agricultural business – assessing a sound creditability. Backgrounds of nontransparent financial figures can be multifold: In one company it is the pure focus on avoiding problems with tax inspections or other authorities. In other companies it is running the business only partially official, though given Ukrainian exemption from profit taxation for agricultural companies cannot be a reason for hiding production and sales partially. Mentioned backgrounds are “saving” VAT, saving PIT and social fund contributions for employees, or the need for in-official funds for serving not officially obtained loans, or just being afraid showing too much profit fueled by the fear of raider attacks.

Saving VAT is in fact not a real argument especially since the stupid special VAT-system for agricultural producers has been abandoned finally by the beginning of this year. We were claiming already for years abandoning this special VAT-system since this system led in practice to the fact, that – though agricultural producers invoiced VAT which they could retain for production expenses – agri-traders did pay to the producers 20% less than world market prices due to problems with VAT reimbursement. Since special VAT system was abandoned and VAT reimbursement works, local prices for agricultural commodities matched up to world market level. Means, where was actually the benefit for the agricultural producer keeping VAT but getting 20% less and no right for VAT-credit: It was not a benefit it was even worse than the usual system.

Coming back to saving PIT and social funds: Yes, 18% PIT + 1,5% MT + 22% social funds contribution are significant figures. But not paying this for the price of not getting finance and avoiding social responsibility for anyway not well paid staff in rural areas is at least a questionable I would even say a stupid approach.

As for needing in-offical funds for serving in-offical loans or the fear of raidar attacks:

Here we have in Germany a proverb that “the cat is biting into its own tale”. In-official loans are in most cases more expensive than official loans at professional banks. And in-official business give more room for exposure to audits of different authorities or even blackmail by such authorities and criminal circles.

As for high interest rates one needs to take current inflation rates into consideration as well: If inflation rate for the current year will be between something between 10-12%, this rate needs to be subtracted from the interest rate applied by banks for loans. Means, getting finance for 18% p.a. leads with mentioned inflation to an effective interest rate of 6-8% p.a, which increases profitability of agricultural commodities since respective prices are mostly linked to the USD. Sure, FX-rate development and inflation are not 100% in line but respective influence is significant.

Last but not least it must be said, that a non-transparent accounting does not foster the credibility of any business planning. Finance provider need reliable detailed business plans and not just some mystic compilation of figures showing Heaven on Earth. We have seen beautiful business plan papers promising annual growth rates of 200%. Serious finance providers will even not take a closer look at that.

But even if financial statements are transparent and show good results there seems to be a tendency in business planning showing a bright future. Doing so, companies do not do themselves a favor: First of all finance providers are not stupid and do not accept an approach in business planning missing the outline of current weaknesses of the business. But most important for a realistic business planning is the readiness pointing to weak issues for the businessman himself. Only with this approach one can start tackling such issues by precisely naming them and showing how being solved. Following this my final recommendation is stop starting drawing nice business plans but rather start finishing your work on weak points of your business – and here a professional business planning showing an honest and self-critical picture of the current situation with a logic detailed approach how to handle given situation for achieving outlined realistic goal.