As the recession in Brazil continues, the number of entrepreneurs that sought bank finance this year fell by 30% over 2015, while 59% more had loan applications rejected, a survey reveals. Lowering the cost of bank finance might help.
The survey, which sampled the views of almost 7,000 entrepreneurs, was released last month by Brazil’s small business agency Sebrae.
It also revealed that 83% of small businesses opted not to resort to banks for finance. This is up from 76% last year (and higher than the average between 2012 and 2016 of 59%).
Instead of banks most entrepreneurs rely on extended payment terms to suppliers or turn to using their credit cards to finance their business.
About half of those surveyed blame the high cost of finance (at an average of 4.5% a month) and about a quarter said paperwork could be reduced to make it easier to get bank finance.
Of those that did apply to banks for finance, 27% were unsuccessful, up from 17% in 2015.
Banks then might be reacting to creeping defaults. A second survey released last month by Sebrae and the country’s central bank revealed that between January 2012 and August 2016 the number of small businesses defaulting on bank loans increased from 3.4% to 8%.
This, while the amount in loans fell from the second quarter of 2014 as the recession neared and the lending rate hit a high of 43% annually.
Sebrae president Guilherme Afif Domingos (pictured above) attributes the decline in both those that sought out bank finance and those that were granted finance, to not only the recession, but to the highly controlled banking sector in Brazil where five banks control 80% of the market.
Relaxing tax debts
To address the rising defaults Sebrae is seeking to allow small firms to renegotiate their tax debts through an amendment made earlier this year to Simples, Brazil’s small business tax regime.
The plan will allow small firms a window of 90 days to renegotiate tax debts, double e present 60 days. In October there were about 600,000 small firms with debts of 21 billion reals ($5.9bn), according to Brazil’s tax authority.
The tax authority in November published an instruction note that establishes the preliminary procedures for the debt rescheduling arrangement. Firms that owe tax payments have until December 11 to lodge a request to reschedule unpaid taxes.
In October Brazil's president Michel Temer announced that between 30 and 40 billion reals in funding for small businesses would be available through two state-owned banks, as well as through three private banks and the state's development agency BNDES.
While banks also plan to reduce the rate that they charge for the finance by up to 30%, they have said they would not announce these immediately, for competitive reasons.
Brazil is taking longer than expected to recover from a recession that began last year and has already seen the number of unemployed almost double to 12 million between 2014 and October, according to its statistics agency. In the third quarter this year, the economy shrank again - this time by 0.8%.
With small firms ending October with net job losses according to Sebrae, making it easier for small businesses to get funding to expand and modernise, might help not only spur job creation, but also get the economy to pick up again.
But to do so Brazil's government must do more to lower the cost of short-term finance if it is to get banks to lend more to small businesses. Convincing the central bank to lower interest rates (which Afif has described as "pornographic" - see this earlier post) will likely prove critical.
*Brazil's central bank on November 30 lowered the benchmark lending rate for the second time in two months, by 0.25% to 13.75%.
Timm is a South African who writes on small business. He lived in São Paulo, Brazil in 2014. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a