Debts and Taxes Hurt Small Businesses

Owners site extortion and inability to collect debts as two reasons their businesses failed.

Photo: CIN

One out of every 12 failed Bosnian companies was targeted by extortionists or corrupt government officials seeking payoffs, according to research conducted by Prism Research Agency for the Center for Investigative Reporting in Sarajevo (CIN).

By comparison, one in 30 companies still in business was targeted.

Businesses that failed said that high rents, stiff competition and high taxes were the main obstacles they faced. One out of three failed businesses said they were unsuccessful in part because they could not collect debts.

The research included 50 entrepreneurs whose businesses had failed, and 100 entrepreneurs who were still in business, to find out why Bosnia and Herzegovina (BiH) is almost dead last in Europe in the number of small businesses per capita. Small businesses are often cited as the most effective means of creating wealth in an economy.

A CIN series on small businesses found that entrepreneurs in BiH face high taxes, high levels of bureaucratic red tape, a dysfunctional and backlogged court system that makes collecting debt almost impossible and banks with onerous requirements.

More than 70 percent of all entrepreneurs in the poll said they were unhappy with the business loans banks had to offer. Six percent of those whose businesses failed said they resorted to loan sharks to get the necessary amount of money, as opposed to only 1 percent of successful businesses. A whopping four out of five businesses were funded with money from family and friends.

Banks in BiH do not give loans to start a business, especially in the first year.

There are also 52 microcredit organizations in BIH that advertise themselves as an alternative source of funding for entrepreneurs who can’t get bank loans. Short-term loans are available, but many businessmen are turned off by their high interest rates. A microcredit loan agreement shown to CIN included a 32 percent interest rate for a two-year loan.

There are many other obstacles.

Owners of failed businesses said the two main reasons they failed were debt to the state (36 percent) and an inability to collect debts (34 percent). Four percent said that their businesses failed due to extortion and loan sharks.

While they were operating, the problems affecting their businesses included companies that controlled the market (24 percent), strong competition (24 percent), high taxes and state contributions (22 percent) and the poor economy of BiH (18 percent).

Most entrepreneurs said the path to business ownership is difficult. They said more than 60 percent of small and medium enterprises fail, and even if they do survive, about 70 percent of them stagnate and fail to grow. Entrepreneurs consistently pointed out that the business’ first year is decisive for its survival.

According to information form the World Bank, entrepreneurs in BiH spend more than 44 percent of their profits on taxes. Out of 175 countries, World Bank ranked BiH 90th in terms of having a positive tax environment. By comparison, Croatia ranked 34th and Serbia 53rd.