Small enterprises in Croatia have recorded under-average productivity but above-average share in profit. Their risks are above-average high as they have no sufficient equity and rely to a large extent on a short-term debt, which makes them rather susceptible to the business cycle fluctuations. Small enterprise sector is at the same time quite dynamic: some 80% growth of employment in the enterprise sector is in small and medium size companies.
Crisis in 2009 has confirmed the thesis on high fragility of SME sector. Not only the ratio of non-performing banking loans was higher for SME than for other market segments even before the crisis, but its growth in 2009 was highest for SME. Non-performing loan ratio grew from 6.5% to 12.7% compared to the growth from 1.7% to 5.8% for large enterprises and from 2.8% to 3.9% for credit to households in the course of 2009.
For that reason, incentives should be focused on a single priority – strengthening of SME equity. Strengthening the equity of small and medium size enterprises will facilitate their access to funds and reduce the problem of fragility and default depending on the business cycle stage. The announced public-private partnerships through risk capital funds are a step in good direction, but these measures will affect a relatively small number of small and medium size enterprises. Systematic measures are required such as tax incentives and special legal protection in the collection of receivables which requires an uncompromising implementation to eradicate the „illiquidity issue” in Croatia for good.
Developed countries have various tax incentives for small and medium size enterprises, such as low tax rates or corporate income tax collection at the moment of pay-out of profits (which is the same as non-taxation of reinvested profits). An argument in favour of this measure may be found in the fact that small and medium size enterprises have above-average share in paid corporate income tax.
Additional regulation of the non-payment issue may be achieved through implementation of EU legislation governing the obligation of public sector to settle its liabilities within the legally defined term, with the introduction of fines for payment delays, notwithstanding whether such fines are part of private contracts or not.