Today we face extremely high inflation, which reaches as much as 21.7%. Moreover, with the European Central Bank having raised base interest rates to control inflation, not only housing but also business loans have become more expensive. However, one should not think of the worst-case scenario. On the contrary, in some cases, this may be one of the more favorable periods to "grow" a business.

During economic downturns, most companies halt additional expenses – spending less on advertising, others reduce the number of jobs, delay development plans, or decide to halt investments. Reducing operational volumes provides a real opportunity for competitors to more easily capture market share, especially by employing high-qualified specialists who have been laid off.

According to data from the Statistics Department, the unemployment rate in Lithuania reached 6.4% in the last quarter of the previous year. For comparison, the unemployment rate in the country was lower in the third quarter of last year – 5.7%. The rising number of unemployed people makes it easier to find talented employees who can be hired more cheaply. Also, during a recession, it is possible not only to expand your business but also to start with new business ideas, which are easier to implement due to reduced competition among companies, a greater number of specialists in the job market, and allocating all funds solely to the business, without overpaying for employees or other services, acquiring them at relatively lower prices. This could be a time to embrace the economic downturn as a unique opportunity for your business.

You can still catch the gravy train – take advantage of the state-provided compensation

The state-established financial institution "Investment and Business Guarantees" (Invega), aiming to expand the business finance market, provides companies taking out loans with an interest compensation tool. Currently, Invega offers businesses the opportunity to get compensations for interest on investment loans and financial leasing (leasing) agreements.

The interest compensation tool aims to help the liquidity of business companies and ease their financial burden. True, until the year before last, Invega also compensated for the interest on working capital loans, but last year these compensations were discontinued. Considering the country's deficit budget, growing debt, and decreasing European Union (EU) support, when just last year the European Commission's approved 2021-2027 EU funds investment program allocated 7 billion 449,000 euros for Lithuania, it is possible that the interest compensation tool could eventually be discontinued. Moreover, Invega has already announced changes in the sizes of compensation – the previously valid 95% interest compensation will be reduced to 50% from March 1st, so there is not much time left to take full advantage of this measure.

According to representatives of Invega, the interest compensation tool was used by nearly 9,300 companies in the small and medium business segment until last October. The compensation for interest is especially helpful for small and medium-sized businesses, which typically incur much higher borrowing costs because they generally do not have a wide choice of financing sources. This opportunity is truly exceptional, as borrowing at 10% interest and compensating 7% leaves only 3% to pay. Therefore, if a company is already considering taking out a loan in the near future, it is beneficial to do so before March to save the compensated funds, which can later be allocated to improve other business operations.

There are more flexible business financing options

A lack of competition in the country's financial system, where the market is dominated by a few major players, influences not only higher prices for banking services but also limits opportunities to obtain loans under favorable conditions for business development.

Banks often hesitate to credit businesses, unwilling to take on risks, even though they could, considering that the overall profit of banks in Lithuania this year could reach a record amount – even one billion euros. According to the Bank of Lithuania, commercial banks operating in the country are characterized by excessive liquidity due to the high number of issued housing loans with variable interest rates. It would seem that banks, boasting impressive performance results and having excess liquidity, should be less strict in evaluating small and medium-sized business companies that approach them for a loan.

It is encouraging that small businesses are helped to implement business ideas by borrowing from other sources, such as crowdfunding platforms, which often apply much more flexible conditions to the borrowing business. Such platforms are considered alternative financing tools, which more than a third of small companies lack. The crowdfunding business model is based on a group of people lending the necessary funds to a company.

A business planning to borrow from a crowdfunding platform does not have to transfer turnovers to one bank or another. To make it convenient for the loan recipient, he can use the services of a bank that suits him. Platforms offer their clients flexible terms for obtaining a loan so that the business can plan its future.

Also, it is often not required to mortgage real estate, which is particularly relevant for small entrepreneurs who have only personal property but have not acquired any company assets. It is important to mention that a businessperson applying to crowdfunding platforms for a loan is likely to receive a response about financing opportunities much faster than from a bank. The decision on financing can be made in a very short period – within 24 hours.

During a crisis – not only challenges but also opportunities

Construction sector, trade, and logistics companies always strive to carry out their business expansion. Of course, it should be added that the construction sector, although rapidly growing, has a very high risk assessment. Specifically, a business characterized by a high risk assessment needs to have a long-term and steady customer base and a financial cushion, which would be useful in facing difficulties in fulfilling financial commitments. It is calculated that the so-called business financial "cushion" should consist of at least 3-6 months of necessary payments.

Funding for catering establishments has decreased, which may have been influenced by a fairly sudden contraction in the catering sector after the COVID-19 pandemic and sharply increased electricity prices. Last month, the price of electricity on the Nord Pool exchange reached 103.06 euros/MWh, whereas just last December it was 264.28 euros/MWh.

For companies that lack accumulated financial funds and do not have a set aside financial "cushion," it may be more difficult, as borrowing for business development requires having some of their own funds. It is likely that the number of companies applying for loans in the second half of spring or summer will increase, as they will have accumulated additional funds and will want to use them to obtain investment loans, which may be intended for increasing production efficiency or implementing innovative solutions.

To significantly reduce business expenses for electricity, it is possible to take advantage of the opportunity to purchase a solar power plant and become an electricity producer oneself. Interest compensation allows a business to recover even half of the amount spent on installing a solar power plant. For a business borrowing at an annual interest rate of 10–12%, 7% is compensated. Such a financial incentive, when part of the interest is compensated, allows a business to implement new projects and optimize production by introducing modern smart technologies, thus reducing production costs and increasing profits.

Borrowing for business expansion is currently cheap – the total cost of credit with all the fees applied by the creditor amounts to about 4-6%, if using the Invega interest compensation tool. Taking advantage of such compensation gives small and medium-sized businesses the opportunity to grow their business by conquering different foreign markets or introducing a new product to the market, saving part of the funds.

No successful business was created during the economic recession years that grew into an international one. Some such businesses – well-known to us, Microsoft or FedEx companies, started operations during the 1971-1973 oil embargo, when OPEC countries along with Egypt and Syria stopped supplying oil to states supporting Israel.

One should not be frightened by the economic crisis and retreat from plans to expand the business. Favorable compensation conditions for lending, where businesses can receive compensations for interest on investment loans and financial leasing (leasing) agreements, give businesses the opportunity to realize goals and gain a competitive advantage.