You're reading: Small businesspeople in Ukraine often need their own financing

Starting a business is a risky venture for any entrepreneur, even more so in investment-unfriendly Ukraine, where many small-scale entrepreneurs are effectively locked out of bank loans because of high interest rates.

Consequently, many new business owners find backing through friends and acquaintances who are ready to become debt investors in exchange for a cut of the profits.

Three years ago when Yevheniya Dzhigomon decided to start Smakojane, a bakery in Kyiv’s Pechersk district, she did not even consider getting a bank loan because of high interest rates that, according to the National Bank of Ukraine, average 15.3 percent currently. Instead, Dzhigomon said she found business partners “through friends of friends. This was the best option for me, and I have many connections from many years working in marketing and distribution.”

Small business is the backbone of Western economies. Yet it is woefully underrepresented in Ukraine. The U.S., with 317 million people, has 28 million businesses with fewer than 100 employees, which together produce nearly half the country’s gross domestic product, according to the U.S. Department of Commerce.

In Ukraine, with a population of 45 million, only 1.6 million small enterprises employing up to 50 people operate. Their combined contribution to GDP is just 7-10 percent, according to the Federation of Employers of Ukraine, with the rest lying in the field of unreported earnings. By contrast, the share of GDP by small businesses in Germany is estimated at 34 percent, World Bank and Eurostat data say.

Dzhigomon created a detailed business plan for her future partners that included costs, market research and future expansion plans. She and her potential partners quickly came to an agreement and within nine months she opened a plant on the outskirts of Kyiv and a shop in Kyiv proper. She put in some of her own money as well.  But Dzhigomon runs the business while the partners navigate the bureaucracy and supply most of the financing. She has a profit-sharing agreement with her partners and employs 20-25 people.

Dzhigomon says that some of her acquaintances find funding sources through social media. “Many people have great ideas,” she says, “but they need to find a venue to locate financing.”

This expression of financial independence was echoed by other small business people with whom the Kyiv Post spoke. Neither Roman Rubchenko, owner of Vopros Bar on Shota Rustaveli Street, nor Lidia Markova, general director at MRP Communications Group, said that they had considered a bank loan for their new enterprises.

Rubchenko, whose previous job included consulting on agriculture and energy issues, used his own savings to open the establishment. “It took me about 40 days from concept to opening,” he said, “although the liquor license (took) longer.” Vopros Bar has been serving meals and making cocktails since June 2013.

Rubchenko consulted friends and family about financing, but they were reluctant to hand over cash amid Ukraine’s poor economic climate. “I wanted to mitigate the risk,” Rubchenko said. “But in the end I had to take it all myself. It has turned out well.”

Although familiar with the bureaucratic process involved in opening a bar, Rubchenko nonetheless hired a company to complete the necessary paperwork.

MRP’s Markova covers operating expenses directly through the company’s clients, although this means of financing is uncertain because companies have cut their budgets, she said. Her MRP Communications Group has seven employees and has been in business for two years, but Markova says the company’s financing needs are not fully met.

Hardly anyone disagrees that financing is becoming scarce.

According to Oksana Prodan, member of parliament with the Ukraine Democratic Alliance for Reform party and deputy chairman of its taxation committee, the Hr 101 billion of deposit outflow since the beginning of the year pushed banks to offer depositors more favorable terms.

“And so money is more expensive, and the real interest rate on loans is increasing,” she said, adding that on average it is 26-28 percent in the local currency.

Officially, lenders are offering small business loans at 14-18 percent in hryvnias and 8-9 percent in U.S. dollars.

The entrepreneurs with whom the Kyiv Post spoke report a shrinking clientele. As a result, banks are less willing to take risks on small, unproven businesses. “In order to repay a loan in 1-3 years, a lot of conditions are needed, including economic growth and rising purchasing power,” lawmaker Prodan explains.

Jean-Jacques Herve, board member at the Ukrainian unit of Credit Agricole bank, says pricey loans are a harsh reality. “The spread between the interest rate on a deposit and on a loan in our bank doesn’t go beyond three percent and this doesn’t allow us to achieve the desired profits,” he said.

There is also a lack of awareness about state and bank-administered funding for small business. None of the entrepreneurs the Kyiv Post spoke with knew about a German-Ukrainian fund to support small business or the European Investment Bank’s $220 million credit line opened for that purpose last year.

Kyiv Post business journalist Evan Ostryzniuk can be reached at [email protected]