Why mid-sized firms are stifled by a lack of finance
Andrew Kinast is the managing partner of Grant Thornton Poland.
In my last article I talked about the consequences of European Union membership on the Polish accounting profession. This week my attention is focussed on business optimism and the barriers to growth faced by domestic medium-sized companies. It just so happens that this month Grant Thornton published the first edition of the International Business Owners Survey (IBOS). This is a successor to the European Business Survey that has for the past 10 years monitored business optimism in Europe. IBOS tracks issues such as business optimism, employment and investment trends, barriers to growth, sources of finance and corporate governance.
Last week Grant Thornton and the Confederation of Polish Industry jointly launched the local edition of IBOS, which included the business-optimism barometer. The chart on the far right shows quite clearly how pessimistic medium-sized businesses here are. It is of little consolation that Hong Kong, Germany and Japan come out worse. The fact that prior to EU accession 43% of Polish respondents are pessimistic about the outcome of 2003 and only 21% are optimistic gives a clear indication of the country's business climate. The survey highlights a number of barriers to growth indicated by Polish businessmen, the largest of which by far is the administrative system. I have in the past written about the idiocies of the systems. Today I want to look at the second largest barrier - the lack of adequate sources of finance.
As every first-year business student knows, the biggest problem with growth is the fact that a business quickly starts running out of cash as more and more resources are tied up in working capital. In the West, the banking system is relatively good at providing small- and medium-sized businesses with finance. Here the common view is that the banks are very bad at financing SMEs. The table at the far left shows quite clearly how far behind medium-sized Polish businesses are when it comes to having access to external finance sources. Only 9% of the companies surveyed have access to long-term finance over five years, something which is very necessary to fund investment in equipment. Only 8% are able to access overdraft facilities compared with a world average of 36%. The use of leasing finance is one-third of the level in Germany.
We know from our own clients that Polish banks are increasingly more restrictive in their lending policies. As a result of an oversight in the law, banks are unable to enforce a floating charge directly against a debtor over the borrower's working capital. This has particular significance for service companies that have a very high proportion of costs (labor) on which they cannot obtain vendor finance and whose main assets will be works in progress and receivables. The banks are increasingly withdrawing finance facilities from companies that should be driving employment growth in the country.
A lack of long-term finance (most credit facilities are renewable on an annual basis since banks can in this way charge a high annual renewal fee) and a lack of overdraft facilities mean that Polish businesses cannot plan their futures. The situation has clearly worsened and is reflected in the level of pessimism. The answer is relatively clear. First, the government must introduce legislation allowing banks to enforce a floating charge against third parties. Second, the government must stop competing with business for scarce resources. So long as the government continues to issue treasury bonds, banks will prefer to buy these rather than seek out troublesome business clients. And last, let's hope that EU accession will open up the Polish banking market to competition from proper banking products aimed at small- and medium-sized businesses, products which meet the needs of entrpepreneurs.
The full IBOS report is available on the GT website at www.pkgt.org.
