Over the past fifteen years, the pearl of the Caucasus, nestled in its mountainous environment, has initiated a series of profound reforms in its economy. The aim of this ambitious revitalisation programme is to attract foreign investors and entrepreneurs with business projects of all types.
In a favourable growth environment Georgian enterprises face two major problems:
With a borrowing rate of 20% or more, the only way to develop your business is to open up capital to finance growth and the acquisition of premises.
An economy is a network of organisations that use infrastructure, human resources and natural or manufactured resources to produce and sell goods and services. A growing economy needs funds to finance this growth. The same is true for all businesses. In Tbilisi or in other cities or in the countryside, you can see many businesses opening and offering goods and/or services. Despite its dynamism, six months or a year later, the business has closed. This phoneme is related to two major problems in Georgia.
When starting a business, the key to success is of course to have good products and services, but also to have a good working capital financing plan that keeps a margin. When we talk about financing a business, we usually think of the bank, but here in Georgia, as in many countries of the world, the interest rates are obviously too high. A loan can only be used for a short-term period and to cover small expenses. While the average net margin is around 10% for many businesses, financing all or part of your business with a rate higher than 18% is simply suicidal.
The first big problem is that companies are undercapitalised, resulting in a lack of liquidity to finance working capital and growth.
When setting up a business, one needs a place to domicile the business and to work. If the entrepreneur provides services by working remotely for a foreign company then he can work from home, but if not then he will need a place to work. In Georgia, the price of renting office space, shops, warehouses or real estate needed for your business is exorbitant. Often, the monthly asking price for a shop can be as high as the potential monthly sales of the business - insane! Entrepreneurs in Georgia are risk-takers, which is fine in a way, but there is a limit: the break-even point. An entrepreneur has to adapt to his market and manage his finances if he wants his business to be active tomorrow.
The second big problem is the price of the real estate that the company needs to establish itself and grow in its market.
If we combine the two big black spots of business in Georgia, we can see very clearly the need for capital in Georgian companies. Capital to finance working capital and capital to finance real estate investment. The purchase price of a property amortized over 10 years is more profitable than renting an office or a shop, especially since the property is an asset of the company and contributes to the strength of its balance sheet. Companies, therefore, need to raise funds.
There are several ways to raise money: either you are rich and can finance your business, or you find a financial institution that will lend money at a rate that will eat up all the margin and make the business disappear, or you make a capital call and finance the growth of the business by opening your business to outside capital.
The advantage for the entrepreneur is that he or she can quickly obtain the necessary funds to enable the company to start its activity in healthy conditions with a long-term vision. The entrepreneur, who also has a risk to manage, can very well allow smallholders to enter the capital by putting a low share price, which will bring a multiplicity of holders who will have a lesser impact, on the company's policy, than a large holder of shares.
The advantage for investors is quite simple, a well-run company can easily have a net margin rate of between 8 and 10% whereas the remuneration of many financial funds, or others, is at best 3%. Investing in one or more companies can be more advantageous. Diversifying your investment by having a real estate part and a securities part shared on companies with different fields of activity is a way to manage the risks and find good investment threads.
Enabling foreign investors to meet Georgian entrepreneurs is the goal of BGG.
Editorial written by Pierre Tsaguria
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