Support for Small Business

There is a great deal of debate about support for SMEs: what form it should take and what should be done. There are many ways to support SMEs, but the state concentrates mostly on interest rate subsidies. From the standpoint of giving entrepreneurs additional income, this is a good measure, but from the standpoint of developing SMEs at the national level, I hold a different view. However, since some entrepreneurs receive cash subsidies to reimburse their interest costs, abolishing or reducing those subsidies will naturally be a very difficult task.

Interest rate subsidies badly distort the workings of the interest rate channel and the very notion of the market price of money. Beyond that, I would like to address some other negative aspects of subsidization.

The state's goal is sustainable GDP growth and the creation of permanent jobs. Sustainability implies that a new business generates enough profit to earn the normal rate of return in its sector, and that, under sensitivity analysis of certain parameters (the price or cost of resources), it remains in the profit zone. In a volatile world, this is what protects a business from various external factors. In other words, if your business generates a 10% return on invested capital, any change in the environment may force it to close, whereas a business generating a 25% return on capital is more resilient and better protected. The cost of borrowed capital is set by the market, and for SMEs it is currently 20%. If a project does not cover a 20% cost of capital, it is not a sustainable business, and without state subsidies the company becomes a problem borrower. This is why banks, when reviewing projects, do not take subsidies into account and approve a loan only if the business can service it without them. So, overall, the subsidies the state pays on behalf of entrepreneurs are simply additional profit for the business. But this gives rise to other problems, which I discuss below.

First, entrepreneurs have no incentive to improve productivity and profitability, because SME subsidies become part of profit and greatly distort the picture of how the business is actually performing. Entrepreneurs have less motivation to improve and develop their businesses. Of course, some will still expand and develop, but there will be fewer of them than if entrepreneurs did not receive additional income from subsidies.

Second, subsidies create unequal conditions between those who receive them and those who do not, since recipients enjoy greater financial capacity. There are two aspects to this: first, not everyone has access to credit, and second, the state does not always have enough resources to meet the demand for subsidies.

The main problem is that a new business has no access to credit because it cannot prove its creditworthiness and has no collateral. Meanwhile, companies that do have such access receive ever more loans and ever more subsidies. This creates a barrier to the entry of additional players, among whom there would surely be competitive and productive ones.

Thus, receiving subsidies does not encourage businesses to develop, creates additional barriers to market entry, and does not improve SMEs' access to credit.

Therefore, subsidies should be directed only at those sectors that are necessary for security reasons, or for upgrading skills and building human capital through knowledge transfer.

In my view, subsidies should be replaced with a guarantee mechanism for SMEs, under which SMEs are given guarantees to banks where their creditworthiness is insufficient or they lack collateral. More entrepreneurs would then have access to credit, and they would focus more on projects capable of covering the normal rate of return for SMEs.