Iryna Yasinovska – Sofia Smolinska


The article substantiates the financial mechanisms of regulation of small business. The main aspects of financial regulation of entrepreneurship are presented. The estimation of the current state of functioning of small business enterprises is given. The peculiarities of entrepreneurship development in developed countries and Ukraine are analyzed. The ways of improvement of financial mechanisms of regulation of small business are given. The direct and indirect directions of state regulation are described, on the basis of which entrepreneurs can attract financial resources for their development.

Key words: small business, financial mechanisms, state, development, direct and indirect directions of state regulation

JEL: E44, E69, G18. G32


In modern conditions, the business environment in the state needs new approaches and principles of state regulation, given its importance for the development of the economic system. After all, the conditions in which entrepreneurs operate, in many cases, are critical and do not provide an expanded reproduction of business entities. An important role in the process of functioning of entrepreneurs must be played by financial regulation, which is provided by the state and provides the basis for providing business entities with the necessary financial resources. As there is a significant imbalance of relations between the state in the field of entrepreneurship and in the financial sphere, there are all grounds to state that there are problems in the process of financial regulation of business activity at the state level. The main purpose of this article is to justify the optimal ways of improving the financial mechanisms of small business development at the state level in accordance with the transformational changes that take place in society at the present stage of its functioning.

1. Financial regulation of entrepreneurship: main aspects

Entrepreneurship in the sphere of small business determines the activity of business entities, which are inherent in the features that are characteristic of entrepreneurial structures in general (initiative, riskiness, independence, creativity, desire for profit, responsibility for performance and innovation, as well as peculiar features, which determine the peculiarities of such functioning of economic entities in the realization of tasks and objectives of business. Problems of entrepreneurship are complex, systemic and multifaceted, they are constantly in the field of scientists, entrepreneurs, practitioners, and public officials.

The issues of business development were updated today in connection with the rethinking of the model of the Ukrainian economy, the definition of priorities for its further development, structural adjustment (Pasinovich, Yasinovska 2015).

Financial regulation of business development as a basic function of public administration should create optimal conditions for the effective functioning of enterprises, to encourage them to expand the reproduction, thus ensuring the development of the national economy of the country. An important component of such regulation of small business development is the system of its state support. Its content, in the first place, is to develop and ensure the implementation of national and regional programs for the development of economic actors.

The main objectives of regulating and supporting small businesses in Europe are to strengthen the single EU internal market, remove administrative barriers to small businesses, improve the legislative framework, and strengthen the interaction of the EU with other countries. Recently, in Europe, interactive tools for small business support, such as information portals, webinars, videoconferences, have become widespread in Europe.

The success of a small business determines the environment in which entrepreneurial structures operate. In fig. 1. The description of the conditions of the business environment, which determine the effectiveness of economic entities.

Fig. 1 Conditions of the business environment that determine the conditions for the functioning of small businesses

Terms of the business environment Their characteristics
1 Economic conditions Determine the specifics of the use of resources and business activities in the economic environment, based on market conditions, level of economic freedom, incomes, tax policy, competitive environment, etc.
2 Legal conditions Expose the essence of the development of legislation, in particular, economic, and the peculiarities of the regulatory influence of the state through the regulatory framework
3 Socio-cultural and demographic conditions Features of the formation of the needs of consumers and their demand for goods and services, as well as the formation of a certain type of economic culture in society
4 Technological conditions Determine the type of implementation of the production process at enterprises and the level of application of their scientific achievements and innovations
5 Natural-geographical conditions Provide an understanding of how the natural conditions and geographical features affect the level of development of business structures
6 Organizational conditions Characterize the system of public administration that regulates the activities of small and medium-sized businesses and their impact on business entities

Source: own study

The sphere of small business is subject to state regulation. State regulation of the sphere of small business is a set of tools, methods, levers and measures that are intended to ensure the effective development of small enterprises through the effective mechanism of influence of state authorities on the activities of economic entities. The main reasons for the presence of the regulatory influence of the state on the sphere of small business activity are:

• the existence of a monopoly environment in society and the need for the formation of a perfect competitive environment in the state;

• the need for price regulation of those groups of goods that are produced by small enterprises;

• the need to adapt labor markets, capitals, resources, intellectual products to the current conditions of managing entrepreneurial structures;

• promoting a stable and harmonious development of society by ensuring the effective functioning of small business enterprises;

• solving international policy and cooperation issues by establishing a favorable business environment within the country.

Enterprises carry out self-regulation of their activity, which is adjusted by the objective laws of the market mechanism, within which all actors in society operate. However, it should be remembered that both physical and legal persons can not be outside the influence of the state, which, in turn, implies its decisive influence on the economic activity of the subjects. It regulates small businesses in the hands of such government bodies as parliament, president, government and individual ministries, as well as relevant bodies of regional, city and district subordination.

2. The current state of functioning of small and medium business

Countries with a developed market economy have a well-developed and well-established system of state support for small businesses.

The basis of the economic policy of most developed countries is the need to create a supportive macroeconomic environment for enterprises of any organizational form. In spite of this, in the field of taxation, small and medium enterprises are actually allocated to a separate group. This approach is explained as an understanding of economic justice – the need to compensate objectively less opportunities for self-financing this category of enterprises. Under the legislation of most developed countries, small business is defined as a special subject of state regulation (Suprunenko, 2009).

The importance of small businesses is reflected in the integrated indicators that characterize the state of the small business sector in the developed countries. They emphasize the fundamental role of small business in the socio-economic and political life of each country (Fig. 2).

Fig. 2 Ratio of medium and small entrepreneurship entities in the total indicators of entrepreneurship entities (data for individual countries) in 2016 (%)

  Number of business entities Total
turnover sold
Number of employed persons Value added at factor costs
Ukraine 99,98 64,8 80,8 62,3
Bulgaria 99,8 70,2 74,8 63,3
Estonia 99,8 78,0 78,6 76,4
Latvia 99,8 77,5 79,1 69,2
Lithuania 99,8 68,7 75,6 68,0
Poland 99,8 56,0 68,2 51,3
Slovakia 99,9 57,7 71,7 55,2
Czech Republic 99,8 56,2 67,3 55,2

Source: Eurostat, State Statistics Service of Ukraine

The share of medium and small enterprises in their total number both in Ukraine and in EU countries is high (over 99.8%). Also significant are the volumes of sales (goods, works, services), the number of workers employed and the added value of production costs. The largest share of sales of the surveyed countries is provided by medium and small enterprises in Latvia, the largest share of employed workers is in medium and small businesses in Ukraine, and Estonia’s small and medium-sized enterprises have the largest share of value added in production costs..

The current state of development of the economy is characterized by a large share of insolvent enterprises and bankrupt. Firm-bankrupt is becoming more and the system of prevention and recovery of enterprises does not effectively operate in practice (Such, Kalichak 2017).

The characteristics of the economy of Ukraine in general and business environment in particular can be well represented by the place of Ukraine in the international ratings.

Efficiency of mechanisms of adjusting of entrepreneurial activity can be сharacterised by value of index of lightness of doing business, which World bank defines. In a period 2013–2018 Ukraine attained considerable progress towards improvement of state regulation in the field of an enterprise, namely simplification of procedure of establishment of business, certain improvement of the system of taxation, registration of ownership etc. In 2018 by this index Ukraine took the 71th place, improving the place in rating, in comparison from 2012, for 80 positions. Question of connecting to power grid the receipts of permissions on building is still not satisfactory.

In 2018 Ukraine took the 81 place by value the index of global competitiveness. The value of this index shows the changes of economy of country. Yes, there was a gradual improvement of position of Ukraine in a post-crisis period and achievement 73 positions in 2013 and considerable worsening in 2014 after annexation of Crimea and beginning of military operations in the East of country. Among factors, that restrain the improvement of position of Ukraine, we can distinguish a corruption, inefficiency of department judicial, inefficiency of the government spending, not sufficient development of financial and corporate sectors, improper level of protection of rights to property. The generalized index that gives an opportunity to estimate the level of innovations in a country is a global innovative index, according to which Ukraine took a 43th position of rating in 2018. In a dynamics to Ukraine it was succeeded to improve the position, however the negatively appraised changes in development of general infrastructure and institutional providing of innovative activity, problem with providing of supremacy of right. The results of scientific research and development of human capital are positive. EU countries occupy much higher places in the rankings that had been analyzed before.

Unfortunately, after some exceptions, Ukraine was not able to improve considerably the positions in the economic rating. It coincides with the conclusions of many analysts, that economic reforms in Ukraine, unfortunately, take place too slowly. In the same time it should be mentioned that Ukraine has a considerable potential for development through maturity, force of society and good education (Yasinovska, Myshchyshyn 2018).

3. Shadow economy

The economy of Ukraine is characterized by the presence of a large enough volume and capacity of the shadow sector, which is an integral part of the national economic system. The problem of shadowing economic activity creates many other related problems, rendering ineffective governmental mechanisms of stimulating the economy, holding back economic development and growth, distorting the conditions for doing business. However, the shadow economy has great potential for the growth of the legal economy. Therefore, it is extremely important to study this issue in terms of opportunities and directions of using the potential of the shadow economy to promote innovation and investment development of the national economy.

As Cherniavsky (2015) notes, the problem of the functioning of the shadow economy in Ukraine remains relevant and multifaceted. According to Professor of Economics at Linz University, Dr. Friedrich Schneider (2012), one of the most reputable experts in the shadow economy in the world, more than 46% of Ukraine’s economy in 2007 was in the „shadow“. The size of the shadow economy in European countries is smaller (Fig. 3).

We agree with Novak A.Ya., who distinguishes three main reasons for non-payment of taxes in full: they do not want to pay, they can not pay due to the burden of tax burden, they do not want to pay due to distrust of the authorities in the budget distribution of collected taxes (Novak 2011). Therefore, the state regulatory policy should be aimed at the formation of an effective business environment that will facilitate the withdrawal of the economy from the shadow.

The main goal of state policy of European countries is to balance the interests of the state and business, to ensure optimal conditions for entrepreneurship, and to increase the competitiveness of small businesses. This policy is carried out through the activities of States and through special programs that are implemented under the auspices of the European Union. The financing of small business support activities is carried out from the structural funds of the European Union, such as the Regional Development Fund, the Social Fund.

Fig. 3.Size of the Shadow Economy of 31 European Countries in 2012 (in % of off. GDP)

Source: Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2012: Some New Facts. 

The shadow economy is a negative phenomenon in the socio-economic life of the country. Medium and small enterprises not only become carriers, but also victims of the shadowy mayhem. In order to minimize the shadow sector, the state system needs to be modernized. Political freedom and effective state regulation, a set of real measures for reforming the economy and supporting entrepreneurship are needed for this.

The main purpose of the shadow economy of Ukraine is to create the necessary conditions for improving the investment climate, reducing tax and regulatory pressure on business activity, protection of property rights and labor relations. These reforms will also give impetus to economic development, which is impossible under high shadow economy conditions.

4. Improvement of financial regulation of small business

The development of small business and the effective performance of its functions require significant changes in ensuring access to financial resources, in particular lending, due to a significant shortage of its own funds. Studying the experience of small business in developed countries suggests that effective financial support for the development of small business enterprises by the state should be carried out through its direct and indirect support.

Regarding the direct support of small business development, it is first of all worth mentioning state assistance to entrepreneurship at the expense of budget allocations. According to foreign experience, for effective state support of small business enterprises, it is expedient to use such basic mechanisms as budgetary lending by means of budget policy; government order; budget subsidies and subsidies.

The most effective form of state support for small business is the recognition of budget lending. It is characterized by the following features: pay and obligatory return. But these features are realized only under certain conditions:

  • asuurance of real responsibility of entrepreneurs-borrowers;
  • control of the authorized bodies of state power for the purposeful use of credit funds;
  • availability of an effective system of repayment of loans, that is, ensuring the principle of payment.

It is important to use the mechanism of government orders to support the activity of small business enterprises. Government orders should be used to stimulate the production of certain types of products, support domestic producers and encourage the development of small businesses, which will have guarantees of product sales and financing their costs.

Regarding budget subsidies and grants, they should be used for the development of small enterprises in order to improve their personnel, technical and information support. For example, we can mention the experience of Japan, in which widespread subsidies were allocated, which cover up to 50% of expenditures for the establishment of centers for the improvement of the technical level of small firms, consulting, training of technical workers, etc. The state assumes the costs of diagnosing the state of small businesses. An integral part of the Japanese system for financing small businesses is the compensation of expenses related to the training of personnel and 2/3 of the expenses for the training of employees.

The financial support of small enterprises by the state should include preferential lending and partial compensation of interest rates on loans. It should be non-personal, but aimed at the sector as a whole. This approach will help to avoid uneven distribution of funds between business entities and abuses in the use of credit privileges by individual entrepreneurs.

Along with direct support for the development of small business by the state, the indirect methods of state financial regulation should act as equally effective. Among them, first of all, it is worth mentioning the improvement of access of business entities to credit resources.

For this purpose, the state should develop measures to facilitate the access of small enterprises to bank financing. In this context, one can expand the awareness of „investment readiness“ of enterprises to increase the ability of small enterprises to attract financial resources.

The introduction of the practice of state guaranteeing the repayment of small enterprises loans to banking institutions will simplify access to credit resources for small businesses and increase the banks‘ confidence in these entities. And this will contribute to a significant reduction in the percentage of bankruptcies among small businesses. Therefore, state guarantees should become one of the key areas of development of the system of state financial support of small business in the near future.

Along with this, one of the ways of solving the problem of guaranteeing the repayment of loans by small business entities is the creation of funds for the provision of guarantees and sureties.

Using the services of specialized guarantee funds will allow you to receive bank loans for those categories of entrepreneurs, which today do not have such a possibility at all. This will increase the level of trust of commercial banks to business borrowers, which will be the key to improving the financing of small businesses.

The main purpose of guaranteeing as a financial instrument is to reduce the risk of a commercial bank by applying an insurance technology: the bank pays the commission to a guarantee institution (fund), which, in turn, will reimburse the pre-determined portion of the loan in case of its non-return. For the borrower, the undoubted advantage is the ability to reduce the bank’s security requirements, since a large part of the risk assumes the guarantee organization. For this, the company also pays the guarantor commission.

Consequently, the development of guarantee services for small entrepreneurs both from the state and from guarantee funds will make it easier for business entities to access credit resources, which will contribute to the undoubted development of small business.

The promotion of alternative financing schemes (leasing, factoring, micro lending and venture financing) should play an important role in stimulating the activities of small enterprises.

One of the most effective forms of small business support is leasing, which involves providing small enterprises with equipment that guarantees the full use of money for their intended purpose. In order to develop leasing operations in the field of small business by the state, the legislation must first be improved. Along with leasing, an important source of financing for small businesses can be factoring as one of the tools of the financial market. The advantage of factoring for a small businessman may be the reduction of credit payment risk, timely collection of receivables, the ability to plan payment transactions, accelerate the turnover of working capital and improve the creditworthiness of the entity.

It is worth mentioning this direction of state support for small enterprises as an improvement of the financial market infrastructure. Financial infrastructure is an institution that collects temporary borrowed money and converts it into loans, such as banks, stock and currency exchanges, investment funds and companies, credit, insurance and guarantee institutions, credit unions, and foundations of public associations.

In order to improve the interaction of small enterprises and objects of financial and credit infrastructure on the part of the state, it is necessary to take measures to ensure information transparency of the financial market, equal access of participants to information flows on it. In this regard, the formation of a single information space for financial and credit infrastructure objects and the provision of legal and open access of small enterprises to it is relevant. In order to provide access to full and reliable information for entrepreneurs, it is necessary to develop information standards that meet the information requirements adopted on the financial markets of the United States and Western Europe.

It is important to ensure the simplification of the access of small enterprises to trading on the stock exchanges, and the creation of a system for disclosing information about securities transactions at exchanges. Receiving such information in real time will enable small businesses to be involved in the purchase and sale of securities and obtain potential returns from their possession.

In order to form innovative business, specialized institutional formations such as „incubators“ that are capable of forming a favorable business environment with the whole spectrum of scientific, production, financial and credit services are practically necessary. Such centers may include business and entrepreneurship development centers, regional technological and innovation centers in higher educational establishments and scientific organizations, structural units of associations of associated enterprises (Smolinska, Cherevaiko 2017).

It is important to take into account the experience of other countries in solving this issue. So, in Poland, as mentioned by Pawel Dec та Piotr Masiukiewicz «The most important of the Polish government in recent years include: the simplification of the procedures for establishing companies (including e-registration), preparation of a new Law Repair and Bankruptcy, implement the law on commercial transactions, implementation of the EU program «second chance» for entrepreneurs, the introduction of free (for one year) of state guarantees for loans liquidity for SMEs, support the establishment and development of SME companies from EU grants (de minimis aid) under the Program Innovative Economy, implementation of the program «Support for export» (Dec, Masiukiewicz 2014).

In our opinion, the most important factors contributing to the further development and solving of specific problems of financing small and medium-sized businesses are the following measures of the regulatory policy of the state: reduction of the number of documents necessary for the conduct of entrepreneurial activity; simplification of tax administration; development and introduction of a mechanism of preferential taxation and differentiation of tax rates for entrepreneurs actively introducing innovations; formation of a single informational resource with information on business conditions, legislation, etc.; transfer of the provision of administrative services in electronic form; creation of an effective mechanism for the implementation of legislative acts; state support for implementation of energy saving measures at the enterprise; active creation of business centers and technology parks, which will support entrepreneurs and create favorable conditions for attracting foreign investments (Yasinovska, Kozak 2018).

The financial support system for medium and small enterprises should be based on compliance with the principles of legal protection, stability and their economic interest. In our opinion, the state should stimulate the growth of economic activity of the population by creating a proper institutional environment, because the creation of a favorable institutional environment in the country is an important factor for improving the support system of the small business sector.


In order to improve the financial mechanisms for regulating small businesses, the following measures should be taken: to develop a number of state measures to support the financial services market infrastructure; to stimulate competition among the subjects of the financial market; to provide access of small business entities to financial resources at the expense of cheaper lending to small businesses; to promote the involvement of a wider range of small business representatives in the program of partial compensation of interest rates on loans to small businesses for their extended reproduction.

The organization of successful small business in the country should be based on effective financial and lending support from the state, the search for new methods of financing small enterprises and the creation of financial infrastructure oriented to them. This, in turn, will enable an increase in the competitiveness of the national economy by strengthening the position of enterprises in the market and conquering them new segments at the international level.


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Information about authors:

PhD, associate professor Iryna Yasinovska

Department of State and Local Finance

Faculty of Financial Management and Business

Ivan Franko National University of Lviv


PhD, associate professor Sofia Smolinska

Department of State and Local Finance

Faculty of Financial Management and Business

Ivan Franko National University of Lviv email: