The current economic conditions are such that many small and medium-sized businesses lack free cash to carry out or develop their activities. This is due to the decline in the purchasing power of customers, serious debt of counterparties, high tax burden of companies, growth of accounts receivable, increase in prices, etc.

In this situation economic entities have to apply for financial support to credit organizations. In many cases it is rather expensive, as small and medium companies cannot participate in preferential lending programs.

In connection with such a development of events the level of credit exposure of subjects is quite high, which forces them to carry out bankruptcy proceedings or go to the shadow sector of the economy.

What’s the problem?

Companies need free financial resources for normal operations, which are left after all current expenses (payment for goods and services, payment of wages, taxes and fees, etc.) have been incurred. If there is not enough money, entrepreneurs turn to banks to obtain loans, which are used to finance current activities or to further develop them.

Since the situation is similar for many entities, the flow of financial resources from one company to another has significantly decreased.

According to the statistics of the Central Bank of the Russian Federation, over the last 10 years the volume of loans received by small businesses has increased significantly. This is primarily due to the fact that counterparties have lost the ability to pay their debts, and many of them have been liquidated or bankrupt.

Credit funds could improve the financial situation of many companies in some way if they were offered on favorable terms. Currently, there are concessional lending programmes with lower interest rates, but they are not available to all entrepreneurs.

The problem is that the loans have preferential terms:

• are offered to organizations on specific types of activities – agriculture, transport, communications, public catering, domestic tourism, etc. Not every company meets this criterion;
• are available not to small business entities, but to higher level players. Under the terms of many programs, the borrower should not have problems with liquidity and solvency, reporting to the IFTS, the official declaration of income. If a small and medium business takes a loan for current activities, it has already had problems with solvency, and therefore in preferential lending it may be refused;
• can be provided by the state support, which is not available to everyone. As a rule, it is provided to companies that have been operating in the market for a long time, participate in public procurement and bidding, have additional financial resources and a very serious business reputation. Small and medium sized organizations (and especially newly established ones) do not meet this criterion and therefore cannot rely on concessional loans with government support.

In such a situation, small businesses have to take out loans on more “expensive” terms. In this case, their financial burden increases, as they have to pay not only current bills, but also the loan servicing.

In the end, their lending rates are increasing significantly, and companies have to go bankrupt or into the shadow sector.

What exit did the entrepreneurs find?

Due to the lack of money and serious lending, entrepreneurs use several options to solve the problem:

• carry out the liquidation or bankruptcy procedure. Thus creditors have the right to repayment of debts in a judicial order. However, if the company does not have the funds to conduct current activities, as well as any property, creditors will not be able to repay the debts. At the same time, financial losses are incurred by different entities – employees do not receive salaries, banks do not repay loans, counterparties do not receive payment for goods or services, the state does not receive taxes;
• They carry out the procedure of absorption by a larger company. In this case, the activity of the organization is also terminated, and the property is transferred to the company that absorbed it. If the takeover procedure is permanent and new companies are not created, a monopolistic economy will eventually be created with the presence of a single monopolist company for each line of business. In this case, it will dictate its terms and prices, which cannot be influenced;
• are leaving the market for the shadow economy. This means that companies use grey or even black schemes of doing business. The most striking examples are the payment of wages “in envelopes” and avoidance of taxes and fees. In this case, the rights of employees regulated by labour legislation are also violated, and no tax payments are made to the budget.

While the first two options may be in line with the law, the third option carries many risks, mainly related to administrative and criminal liability.

In addition, there is a serious risk of lengthy litigation, disqualification of directors, reputational damage, exclusion from the Unified State Register of Legal Entities, fines, etc. However, companies cannot operate under white schemes because they do not have the necessary financial capacity to do so.