Funding gap stifles SMEs
By : Alexander Stocks
Starting up a private business was almost a mission impossible during the stifling days of communist rule in Poland. Absurd as it sounds, even selling cosmetics could get you into trouble.
When doctor of pharmacology Irena Eris started peddling a home-mixed facial cream in 1983, merchants were reluctant to even take a look at the product. Eventually a few agreed to give the entrepreneur a chance and put the cream on their shelves. Word spread quickly that Eris had something special.
With husband Henryk acting as bookkeeper and one other helper, Eris began developing and marketing creams, toners and moisturizers. The company, now called Laboratorium Kosmetyczne Dr. Irena Eris, soon started to grow with new employees joining every few months. In 1989 Eris bought land to build a modern factory in Piaseczno and by 1993, when the factory began operations, the company had 100 workers.
Today, Eris products are sold internationally and are the most popular skin-care cosmetics in Poland, with a 16% market share. The company employs 250 people and sells products in 12,000 shops, pharmacies and beauty salons around the country through 16 distributors. It also operates a health spa in the mountains and two cosmetic institutes, with a handful more operated through franchisees.
"We never dreamed we'd have such a big factory and be a leader on the Polish market," Eris said. "Our dream was 5,000 (products) per month and now we produce one and a half million per month." Though times were tough in the beginning, Eris said that making quality products made the difference. "We never forgot about quality. I think quality was the first thing that sold our clients (on our products)," she said.
In 1999, the turnover of Eris cosmetics was zl. 70 million ($16.28 million) and so far this year the company has made zl. 55 million ($12.79 million). The firm now employs 250 staff and is above the European Union's classification for small- and medium-sized enterprises (SMEs). Eris herself is astonished by this success, which, considering that only 1% of Poland's 1.5 million SMEs ever expand from small to medium-size companies, is all the more impressive as she's had limited outside financial help.
Most analysts agree that more companies have to qualify as SMEs if Poland's economy is to develop successfully. According to Peter Zatyko, an SME specialist with Citibank (Hungary), it's essential that more companies continue to grow into viable operations to help keep unemployment down and also help Poland compete successfully when it eventually joins the EU.
The EU's definition of a small enterprise is one that employs fewer than 50 people and has annual net revenue of less than zl. 7 million ($1.63 million). A medium-sized company has fewer than 250 employees and no more than zl. 40 million ($9.30 million) in turnover. If shareholders other than small and medium entrepreneurs hold more than 25% of shares or stock in a business, it no longer qualifies as an SME.
But with most of Poland's business flowing through family-owned operations, investors are often hard to come by. One of the most common complaints among entrepreneurs is a lack of access to funding. Without collateral for security, banks and those offering financing tools are reluctant to take chances.
Zatyko said Hungary generally has a broader risk appetite than Poland because its banking sector is more liberal. But Poland, Hungary and the Czech Republic are similar when it comes to having too many companies failing to expand, he said.
Frustrated entrepreneurs
Polish entrepreneurs are understandably frustrated at what they see as a lack of government support for smaller businesses. Without support, there's little incentive for expansion. "We understand the position of small and medium companies that decide not to grow because hiring new employees means new costs," said Marcin Smajek, marketing director of Rylko, a private shoe company. He said SMEs are generally ignored by the government, which is more interested in helping bigger concerns such as the state-run monopolies. And it's a sector that is growing. SMEs produce half the country's GDP and employ 60% of the workforce, according to the Economy Ministry.
However, attitudes to financing small businesses are changing in Poland, albeit slowly. Citibank, for example, offers its Citibusiness line of loans to smaller companies, although these types of loans often require collateral. Other lenders offer micro-funds. In place of collateral, Fundusz Mikro, a division of Enterprise Investors, only requires co-signatures from three additional usually interdependent business operators. This triples the obligation, cooperation and trust and has proved a successful loan model, said Agata Szostek, Fundusz Mikro's international relations director.
Established in 1994 by the Polish American Enterprise Fund (PAEF), Fundusz Mikro offers loans averaging $1,600 but never exceeding $8,000, Szostek said. Some clients are already taking out their sixth and seventh loans, she said. Last year, Fundusz Mikro added loans for rural micro-businesses and loans for SME-supportive associations to its stable. It currently works through 31 branches and has loaned more than $61 million to some 20,000 enterprises in Poland. These are often family-run companies with fewer than five employees, Szostek said.
Though not as easily available, some entrepreneurs are getting funded by venture capital funds. David Hartford, president of Pioneer Investment Poland, said his fund looks for companies showing potential growth. Hartford said technology, media and telecoms (TMT) companies are particularly attractive investments. Computer equipment distribution company TechMex is a Pioneer investment.
But where does that leave the smaller enterprises such as plumbers, bakers or computer specialists? Hartford believes Poland is no different than anywhere else. It's at an early stage of development and only one out of every 100 companies globally seeking venture financing receives it, he said.
But as Poland develops, other types of venture capital investors are also looking at smaller businesses. These "angel investors," as Hartford calls them, are serial entrepreneurs willing to invest anywhere from $50,000 to several million dollars into attractive start-up companies, he said.
As Western Europe begins to catch up with the United States in venture financing, Poland should not be too far behind, Hartford said. "There's a lot of progress that has been made in Poland and it's probably been much faster than in the United States," he said. "But there's only so much of the infrastructure that could be parachuted in."
Infrastructure problems such as poor roads, a heavily regulated telecoms industry and a lack of laws governing the corporate world put Poland at a huge disadvantage, Hartford said. Other financing products like banks offering loans at market rates and then taking warrants for partial ownership or stock in companies have yet to make their way to Poland, he added.
Government initiative
Perhaps the best way to push companies along the path to profitability and growth is through government-sponsored programs. Miroslaw Marek, director of a government department concerned with SMEs, said a government initiative introduced in 1999 highlights others ways to assist small businesses. Some are legislative, while others offer infrastructural assistance.
A third tier of assistance, the Polish Foundation for the Promotion of Small- and Medium-sized Enterprises, has already set up a network of 130 regional business promotion centers providing advice, business-development training and financing to small businesses.
"We hope to increase the competitiveness of our SMEs," Marek said. "We are afraid that Polish SMEs are not fully aware of what their options might be at the moment."
Although a number of support programs were founded through the 1999 initiative, Marek said funding has only been made available in the past few months through provisions written into the 2000 budget. For that reason, many programs are in their pilot stages and difficult to assess for effectiveness, he said. Roughly zl. 349.1 million ($81.19 million) is to be spent by 2002 on programs aiming to increase the competitiveness of SMEs, SME exports and sources of financing.
Since 1995, the National Loan Guarantee Fund has been handing out loans through 20 regional and one national fund, Marek said. By 1997, 80 guaranteed loans were issued worth zl. 14.7 million ($3.4 million), an amount the Economy Ministry considers too low.
New management training programs should work as well because the quality of management is a major weakness of most small Polish companies, Marek said.
In contrast, the EU, which Poland hopes to join in 2003, spent a combined E83.65 billion on state aid for SMEs from 1994 through 1996. Germany led the group at E6.9 billion and Italy spent E4.7 billion. "The European Union obviously is and must be our benchmark," Marek said.
