Latvia has a significant opportunity to enhance its economic growth by increasing the amount of loans granted to small and medium-sized enterprises (SMEs). This potential, however, remains largely untapped, according to recent insights from industry experts.

Entrepreneurs in Latvia are hesitant to borrow money due to a lack of understanding in dealing with financiers, while financiers themselves are not proactive in reaching out to potential borrowers. This lack of engagement results in credit activity in Latvia being one of the lowest in the eurozone, leading to a loss of approximately EUR 12.5 billion each year that could be invested in business development.

“Entrepreneurs are afraid to borrow money because they do not know how to work with the financiers properly, but the financiers don’t go! We don’t have to be afraid of us. Credit activity in Latvia is still one of the lowest in the eurozone, which results in merchants losing about EUR 12.5 billion each year, which could be invested in business development. There is a feeling that entrepreneurs are currently taking a passive position and waiting for something to happen. They do not want to reach out to the financiers because they are afraid they will be refused, at the same time, statistics show that the lack of money is one of the most common causes of business bankruptcy. 92% of businesses are bankrupt worldwide because they lack money, so raising funding for the company’s growth is crucial, ”
Arthur Geisari

The Economic Impact of Low Lending

According to Eurostat data, in the first quarter of 2024, loans to non-financial companies and households in Latvia were only 27.5% of the country’s gross domestic product (GDP), totaling EUR 10.9 billion. This figure is starkly contrasted by the fact that there are more than 35,000 companies in Latvia with an annual turnover of over 50 thousand euros and positive equity.

This indicates that Latvia’s potential to borrow is 3.7 times higher than current levels. If this potential were fully utilized, each entrepreneur could potentially earn an additional EUR 36,000 per year, or EUR 3,000 per month. This underscores the critical role that funding plays in business growth.

“Money is the cornerstone of business – business blood! Increasing the amount of loans granted and developing new business lines would benefit everyone – both economy and GDP and tax revenue would grow. Banks and entrepreneurs themselves could earn more. That would be a ‘win-win’ situation,”
Arthur Geisari

Addressing the Funding Gap

To address this funding gap, the Riga Business Chamber, in collaboration with Outerta Finance and other financiers, organized an event called “Business Funding” on February 19, 2024. The event aimed to dispel business stereotypes related to borrowing and introduce entrepreneurs to various investment opportunities.

The event featured industry experts such as Arnis Bloomfelds, the head of Erst Finance, who discussed the necessary steps before seeking funding, and Marcis Laksa, the sales manager at Capitalia, who introduced various forms of investment. Mārtiņš Simsons, Senior Lending Project Manager at Bluor Bank, shared his experience and insights on the lending process.

Arthur Geisari, the initiator of the “Oferta Finance” idea, also participated, highlighting the importance of increasing lending to stimulate economic growth.

Practical Applications and Case Studies

The event brought together over 50 entrepreneurs from various sectors, providing them with valuable insights and practical applications. For instance, small businesses in the U.S. often face similar challenges when seeking funding. A study by the Federal Reserve Bank of New York found that 40% of small businesses in the U.S. struggle to obtain adequate financing, which hampers their growth potential.

In contrast, countries like Sweden and Denmark have higher lending rates and more proactive financial institutions, resulting in higher economic growth and lower business failure rates. By learning from these models, Latvia can enhance its lending environment and foster a more robust business ecosystem.

Counterarguments and Future Prospects

Critics may argue that increasing lending could lead to higher default rates and economic instability. However, with proper risk management and financial education, these risks can be mitigated. For example, the U.S. Small Business Administration (SBA) offers various loan programs and resources to help small businesses navigate the lending process, reducing the risk of default.

Looking ahead, Latvia can leverage technology and data analytics to better assess creditworthiness and tailor lending products to meet the specific needs of SMEs. This approach has been successful in countries like Singapore, where fintech companies use advanced analytics to provide more accessible and affordable lending options.