22nd Oct 2016


Small businesses: silent sufferers in the economic crisis

  • Record shop: many entrepreneur families live in fear that an unpaid invoice will make them go bankrupt (Photo: realSMILEY)

“...There is still no date for the hearing, although I have been inquiring monthly in the last 8 months. I do not know anything about my case, I do not get any information. There are many victims in the same situation, all of them feel hopeless. Nobody believes that it is possible to reach a fair verdict. Victims are spending a lot of money on lawyers without results. This process has been going on since September 2007 and so far nothing has happened. I am starving and sometimes I cannot even buy my diabetes medicines and the person who caused this is enjoying his life.”

The above paragraph is taken from a letter, written by a 53-year old woman. She had been working as a pharmacist entrepreneur until she went bankrupt because of an unpaid order.

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Her present situation is hopeless. Her family has collapsed and she is living in rented lodgings. She attempted suicide several times, and has been treated for a nervous breakdown.

There have been documented many cases where stress caused by such circumstances has resulted in stroke, cardiac infarction or suicide. These entrepreneurs, with 15-20 years of experience, did not go bankrupt because they mismanaged their enterprise or had misjudged the risk of the business.

It is due to unpaid bills. Today many micro- and small entrepreneur families live in fear that because of an unpaid invoice they can go bankrupt anytime. And such bankruptcy can result in the loss of their private assets which have been accumulated with several years of hard work.

The business environment for small businesses has become intolerable because of so-called “chain indebtedness”.

This means that the small businesses hired by large “project companies”, often ones which have won EU-financed state projects simply do not get paid before work is done. So they have to take out credit with the bank to pay for materials and wages.

In order to issue the credit – which is very often a so-called “currency-based” credit - the bank puts a mortgage on their homes or other assets. If the small businesses do not get paid at all, they will lose everything.

In addition, this “currency-based credit” has nothing to do with any currency. The bank lends Hungarian money, but calculates interest rates and all bank costs according to the actual exchange rate of the Hungarian Forint to the given currency.

As the Hungarian currency has plummeted in value over the last two years, businesses have to pay back up to three times more than what they originally borrowed. Many small businesses have gone under because of this.

Many business owners become socially vulnerable, although as entrepreneurs they were able to support their family and employ five to ten people.

The consequences of a bankruptcy – due to no fault of their own - can lead to serious health problems. The chain of generations is broken. The younger generation should now be taking over the business from their parents – but seeing the problems, they are no longer interested in doing so.

There is no sanction for not paying invoices, even if the victim has to bear further losses while the dishonest actors enjoy their gains.

The task of small businesses is not only to produce a significant part of the domestic product, and be employers, they have to ensure proper living conditions for themselves as well.

They also have to be able to develop their business. If the micro- and small enterprises involved in production and employment go bankrupt while the enterprises of dishonest customers flourish, the chances for sound economic growth and job creation deteriorate. Meanwhile business ethics and the societal cohesion are damaged.

This raises important questions. Can it be a general practice in the EU that while businesses do not have the right to receive the compensation for the work performed, they are obliged to pay all the taxes including VAT, even if as a consequence they lose everything?

The Hungarian government has slowly started realizing the scale of this problem. But with a high unemployment rate and an economy recession, action needs to be taken quickly.

The writer is an economist from Hungary.


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