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5ECONOMIC SCIENCES
THE ROLE OF GUARANTEE FUNDS IN SUPPORTING ENTREPRENEURSHIP IN POLAND
Kuchcinski A.
PhD in economics, assistant professor University of Social Sciences in Lodz
ABSTRACT
The problem of financing enterprises is a serious barrier that hinders the development of SME in Poland. Attempts to solve the problem are being made by the guarantee funds, i.e. financial institutions that provide credit guarantees for enterprises.
The aim of the article is to present the important activity of guarantee funds in Poland and to identify their role. To achieve this goal, the author used the method of literature and source data analysis. Keywords: guarantee funds, entrepreneurship, SME sector.
Introduction
The issue of financing activities is a "sensitive" problem faced by companies at different stages of their development. Enterprises (mainly micro and small) are more willing to use their own resources when choosing a source of financing. The abandonment of other forms of financing is due to fear of their use and lack of creditworthiness. It is therefore important to create programmes that help companies to raise finance, as the obstacles to obtaining credit or loans are not the interest rate, but the conditions they have to meet [1, p.30]. Lack of credit history, required collaterals or high costs of application processing constitute barriers to access to external capital. One of the instruments by means of which enterprises will increase their ability to obtain external financial resources are non-banking sources of financing, such as guarantee funds [2, p.503.].
Guarantee funds are financial institutions that take over credit risk from banks. They are a source of long-term financing for enterprises, i.e. they are an instrument that meets capital needs. These funds are part of a financial combination of innovative support for the development of small and medium-sized enterprises. They provide aid mainly to enterprises of the SME sector in the form of guarantees. The guarantee itself is a security for the repayment of a debt (credit or loan) that a company has contracted with a given financial institution [3, p.187].
Guarantee funds are are non-profit organisations. The potential profit cannot be used for dividend payments, but only increases the guarantee capital, which increases the security and credibility of the fund. The guarantee fund is primarily capital. The fund secures loans with its own financial resources, which it holds, i.e. guarantee capital (fund). Capital is also a guarantee for the bank that the guarantees granted are covered and the fund is sol vent [4, p.116-118].
The purpose of the guarantee funds is to facilitate access to external financial resources in the form of guarantees for micro, small and medium-sized enterprises. Their activities affect not only the development of local and regional entrepreneurship, but also have a positive impact on the economy as a whole, as they increase its competitiveness and innovation. It should be stressed that these funds do not directly provide financial resources for businesses, nor do they help to obtain
or improve their creditworthiness. They provide support only to those entrepreneurs whose only shortcoming is the lack or inadequacy of debt security. Support is implemented in the following areas, namely reducing the risk of financing the enterprise and building its credit history, providing support in the area of loan security, verifying the financial analyses contained in the business plan [5, p.223].
Importance of guarantee funds
In response to the steadily deteriorating position of SME enterprises in relation to large companies in terms of access to services offered by banks, guarantee funds were established. Despite the fact that in the time of growing competition among various financial institutions also on the banking services market confidence in small and medium enterprises is growing, it seems that assistance from the guarantee funds is still necessary, especially in the scope of providing support to the unemployed who want to run their own business [6, p.105-106].
Surety funds operate on the basis of general legal regulations, i.e. the provisions of the Civil Law and the provisions of the Commercial Companies Act, and are not subject to any special control. Although the funds were established at the beginning of the 1990s, no comprehensive legislative solutions have been developed to date. On the one hand, the fund's activities are based on regulations that regulate normal economic relations, while on the other hand, they benefit from the provisions of national and regional programmes they implement, which are financed from public funds and structural funds. The current legal acts, which regulate, among others, the rules of granting sureties and guarantees by the State Treasury, do not cover the issue of activity of entities in the form of sureties funds [7, p.89].
Funds are characterized by a diversified structure in terms of organizational and legal form, the size of the capital held, the procedures for granting guarantees or the territorial scope of their activities. They form a group of independent entities specialized exclusively in the field of guarantee activity, but there are also such funds which are one of the elements of a larger entity's activity. It is difficult to determine the exact number of functioning institutions of this type, mainly due to the
fact that it is a licensed activity and no special registration procedure is required [1, p.31]. A large number of guarantee funds have been set up by local authorities, local organisations and associations. Most often they operate in the form of a company, associations and foundations.
Taking into account the value of capital held by credit guarantee funds, the following funds are distinguished [8, p.10]:
- very small - guarantee capital < PLN 2 million,
- small - PLN 2 million < guarantee capital < PLN 10 million,
- average - PLN 10 million < guarantee capital < PLN 20 million,
- large - PLN 20 million < guarantee capital < PLN 50 million,
- very large - PLN 50 million < guarantee capital.
In order for a company to be able to apply for a loan guarantee, it must meet certain conditions. Firstly, it is important to have the status of an entrepreneur and its activity must be conducted in the territory of the Republic of Poland. An application for a loan or credit should be submitted to such a financial institution, e.g. a bank or a loan fund, which on the basis of a concluded agreement cooperates with a given guarantee fund. A surety may cover a loan or a credit if the financial resources are used for purposes related to commencing or conducting business activity. If the entrepreneur is obliged to repay the previously received public aid, the surety cannot be granted. The value of the granted surety may not exceed 5% of the guarantee fund's equity. The maximum value of a surety may be granted up to 80% of the loan amount, while the value of the surety may not exceed 80% of the amount of current liabilities resulting from the credit/loan agreement. Surety funds grant a surety for a maximum period of approx. 60 months, and fees and commissions are charged from the moment the agreement is concluded until the surety expires. The amount of the commission depends mainly on the duration of the loan agreement. Funds enable entrepreneurs to repay their commitments in installments [9, p.47].
The common element in all the credit guarantee funds operating in Poland is the bank's primary role, which means that the initiation of the procedure for granting or refusing a guarantee in the fund depends on the bank's positive assessment of the possibility of financing the project. The entrepreneur first submits the required application to a given guarantee fund together with supporting documentation [10, p.31]. The scope of such documentation should correspond to the documentation required by banks, as funds aim at standardising their documentation with that used by banks. Therefore, in addition to the application, the results of the analysis of the application of the entrepreneur applying for a loan and the results of the assessment of the
investment project together with the documents on the basis of which the results were achieved are attached. Both the analysis and the assessment were carried out in accordance with the procedures in force in the bank. Current registration and statutory documents not older than 3 months are also required, as well as documents confirming that the entrepreneur has no arrears with the Social Insurance Institution and the State Treasury. The application is also accompanied by a copy of the agreement or decision on granting a loan [11, p.85].
Under a guarantee agreement, the fund undertakes to reimburse the bank for any loan or part thereof in the event that the borrower fails to repay the loan to the bank. As a result, the bank receives credible collateral, while the borrower may obtain funds in the form of a loan [12, p.153].
In each of the Funds there are two bodies which take part in the evaluation of the applications. The first body (usually the fund director) evaluates the formal and substantive aspects of the application, while the final decision to grant a guarantee is made by the second body, i.e. the selection committee based on the fund director's analysis and information about the entrepreneur. This committee consists of managing and/or supervising bodies and persons from outside the fund [10, p. 32].
Guarantee funds as parabank institutions grant guarantees for loans and credits to enterprises, mainly for activities related to starting or further development of the company, financing its activities and investments, for purposes related to the implementation of innovative technological solutions or creation of new jobs [13, p.330]. In addition to assuming the risk of insolvency of the company, these funds also provide other services such as helping clients with formalities to obtain credit and organizing various additional training courses. They also take over the obligation to monitor borrowers in order to strengthen their cooperation with banks [14, p.330].
Despite the existence of many credit guarantee funds based essentially on a single mechanism, there are some differences between them which affect their differentiation. For example, there is a diversity in terms of defining the target client of the fund. Sureties are granted mainly to the SME sector, however, there are some preferences. Funds established on the basis of the resources of the Agricultural Property Agency of the Treasury may be guaranteed to a person residing in a rural area. The individual character of the funds' activity is also reflected in the amount of the surety offered [15, p.21]. Table 1 presents typical features of guarantee products, which in some respects may differ from the products offered by individual funds, but these differences are negligible and do not have a significant impact on the functioning of the guarantee funds system in Poland.
Table 1.
Standard features of surety products in Poland [16, p.157]_
Beneficiaries of the guarantee • Micro, small and medium-sized enterprises conducting business activity and not being in a difficult situation within the meaning of EU regulations, usually operating on the market for at least 3 months,
Application procedure for surety • The beneficiary should submit an application for a loan/loan guarantee through a financing institution (commercial bank or loan fund) together with the documents required by the financing institution and the guarantee fund. The period for applying for the surety is at least 7 days from the date of submission of the necessary documents, the maximum waiting time may be 1 month. As a rule, documents submitted to the financing institution are sufficient to apply for a guarantee. It is necessary to submit a short application for a guarantee to the guarantee fund via a financial institution. The Guarantee Fund shall carry out a risk assessment of the beneficiary independent of the financing institution.
Surety amount • It depends on the amount of the fund's guarantee capital - not more than 5% of the fund's guarantee capital. • A surety for one entrepreneur or entrepreneurs related by capital may not be higher than 80% of the loan value. • As a rule, guarantee funds apply the guarantee principle up to 70% of the loan value, but on average 60%. • Taking into account the largest guarantee fund in Poland, POLFUND FPK with the largest capital at its disposal (excluding KFPK and FPU Funds), the maximum guarantee is PLN 3,150 thousand.
Surety period • Hand-guaranteed for a standard period of 12 months with a maximum period of 60 months.
Purpose of the guarantee Sureties may be used for any credit and loan purpose related to the conducted business activity, including e.g. for purposes related to the conducted business activity: • investment, • rotatable, • turnover and investment.
Surety security • Beneficiary's blank promissory note together with a promissory note declaration -authorizing the guarantee fund to fill in the promissory note in case of problems with the execution of the guarantee. • Very rarely other forms of material security.
Surety fees • No fees shall be charged for the acceptance and processing of a request for surety, unless it concerns changes in the terms and conditions of a surety during the term of a surety agreement. • Surety fee depends on the period for which the surety was granted. • Surety fees are divided into an initial fee and an annual or quarterly fee for the duration of the surety. • The one-time preliminary fee for a surety varies from 0.5 to 3% of the value of the surety amount. • The annual fee is maximum 1.5% of the value of the active guarantee.
Method of payment of the guarantee to the sponsoring undertaking • The payment of the value of the surety due to the institution shall normally take place within 1 to 6 months of the institution's becoming aware of its creditworthiness.
Recovery of amounts receivable • Recovery is usually carried out by a guarantee fund, often in cooperation with a bank.
Guarantee fund operating area/ availability of guarantees Guarantee funds are local, regional or national in scope. The possibility of using the offer of the guarantee fund depends on the amount of its capital and the scope of its activity. As a rule, in order to be able to use the funds offered, an entrepreneur must have a registered office or, in the case of a natural person, a place of residence or main place of business within the area where the guarantee fund operates, and a contract with a financing institution is important.
Guarantee funds have become a key element of the financial market and the system supporting the development of the SME sector. The strategic goal of the guarantee funds is to facilitate access to external
sources of financing for micro, small and medium enterprises. The objectives of their functioning are covered by barriers faced by enterprises in accessing financing. In this connection, the functions performed by the funds include: reducing financial risk and creating
credit history of enterprises and creating collateral for bank loans. They also verify business plans drawn up by companies and enable banks to obtain information about a given economic entity [16, p.155].
The above functions performed by the guarantee funds result in their two main objectives of activity, i.e. overarching and intermediate objectives. Within the scope of overriding objectives, the funds provide enterprises with easy access to external forms of financing and create an integrated, effective and secure system of guarantee funds. On the other hand, intermediate objectives include increasing corporate lending and having a positive impact on the labour market, as they contribute to the creation of new jobs and the preservation of existing ones [16, p.137].
Thanks to the support that micro, small and medium enterprises may receive from the guarantee funds, it is possible for a situation to appear in the poviat or commune where the dynamics of their economic development increases. Therefore, it is very important for local authorities to provide support to both new and existing guarantee funds [17, p.490].
Activity of guarantee funds
Guarantee funds are one of the business support institutions which have adopted as their main objective the provision of assistance to various business entities in the form of material guarantees to those entities which apply for financing [18, p.273]. The offer of credit guarantee funds is characterized by complementarity mainly with services offered by banks and loan products offered by various financial institutions. Therefore, the granted guarantees must be provided together with a package of services of commercial banks, loan institutions and public entities (e.g. poviat employment offices). In order for the guarantee funds to be able to conduct effective activity, it is required to formulate common rules and forms of their functioning within the scope of services provided to local entrepreneurs [19, p.91].
The guarantee market accessible to small and medium-sized enterprises is shaped by the "Bank Gospo-darstwa Krajowego", which provides guarantees and is a co-owner of a large number of guarantee funds, as well as local, subregion and regional guarantee funds [20, p.65].
An important role in the functioning and development of guarantee funds is played by the National Guarantee Group, which integrates local and regional guarantee funds with the participation of local government units and Bank Gospodarstwa Krajowego. Currently there are 19 local and regional guarantee funds operating within the Group and its objective is to support shareholders in the guarantee activity by means of cooperation with institutions responsible for formulating legal regulations concerning the guarantee market and work on standardization of the processes occurring in the funds. The Group deals with advertising and publishing activities, provides consulting and training services, manages the database and supports the use of IT tools. The National Guarantee Group together with the Polish Banks Association has developed common standards of guarantee activity [20, p.47].
A very important element for the functioning of guarantee funds are associations, namely the National Association of Guarantee Funds. The Association was established in 1996 at the time of liberalization and development of financial services and consists of people who are engaged in activities aimed at the development of the financial market for the SME sector and various financial institutions and economic and social organizations supporting the development of these enterprises. The aim of the National Association of Guarantee Funds is primarily to support the development of the system of credit guarantee funds and to cooperate with those institutions (government, local government, financial) that also operate in this field. They also promote guarantee funds and disseminate knowledge and exchange experiences in the field of guarantee activity. The Association cooperates with Bank Gospodarstwa Krajowego, the Polish Agency for Enterprise Development and various agencies involved in building a system of financial instruments, especially guarantees [21].
Guarantee funds in Poland cooperate with various business entities, mainly with commercial banks, but also with a group of loan funds and financial institutions. The activity of these funds is reflected in the amounts of loans and credits disbursed thanks to the following guarantees [19, p.92].
The activity of guarantee funds depends on many factors, including the amount of capital held. The governmental program "Capital for entrepreneurs" implemented in 2002-2006, which at the end of 2007 allowed 51 credit guarantee funds to have about PLN 589 million of funds from subsidies under the Sectoral Operational Program Improvement of the Competitiveness of Enterprises and contributed shares and stocks of Bank Gospodarstwa Krajowego, was of significant importance for the development and size of the capital held by the guarantee funds. In 2009, the document "Directions of development of loan and guarantee funds for small and medium enterprises in the years 2009-2013" was adopted, where in this financial perspective these funds received support for development within the framework of organizational and economic activities. The funds could apply for capitalisation of their activities from the Regional Operational Programmes and from the Framework Programme for Competitiveness and Innovation [22, p.3-4].
As at 31.12.2016, the funds had capital of approximately PLN 1.1 billion, which in comparison to the previous year meant a decrease by approximately PLN 29 million. This situation is mainly related to the fact that some of the guarantees granted were recognised as repaid and that 44 guarantee funds operated in 2015 [23, p.6-7].
The activity of the funds, on the other hand, is measured by the number of guarantees granted. According to the report of the National Association of Guarantee Funds, at the end of 2016, 7453 guarantees were granted, where an annual increase in the number of granted guarantees is observed over a period of 5 years. As shown in Figure 4, the value of sureties granted has also increased. Compared to the previous year, this value increased by PLN 25 million and as at
31.12.2016 amounted to PLN 949 million. The high value of guarantees is close to the situation where in the years 2011-2012 the value was around PLN 1 billion. The observed growth of these entities is a consequence of the adaptation of the guarantee funds to the functioning of the competitive offer of de minimis guarantees and granting guarantees as tender deposits [23, p.8].
As can be seen from Graph 1, the most frequent guarantees are granted to enterprises employing up to 9 persons, where they constitute 60% of all guarantees granted at the end of 2016. In the three presented entities in the years 2014-2016, an increase in the number of such sureties can be observed.
8 000 7 453
7 000 f- noc
6 175 6 336
6 000 5 678 5 578
5 000 4 000 3 000 2 000 1 000 0
2012 2013 2014 2015 2016
■ Number of guarantees ■ Value (mln PLN)
Graph 1. Number and value of sureties granted by the funds in 2012-2016
5 000
4 000
3 000
2 000
1 000
4 495
2014
2015
I micro ■ small ■ medium other
2016
0
Graph 2. The guarantees provided by the funds over the period 2014-2016 by size of enterprise
Summary
Micro, small and medium enterprises play a key role in the shaping of the country's economy, as evidenced by the fact that they constitute 99% of all enterprises. The SME sector contributes not only to the creation of new jobs but also has a significant share in the creation of the gross domestic product, therefore supporting the development of enterprises by various national, regional and local institutions is so important.
The main problem of enterprises, which limits the possibility of continuous development, expansion of their activity, undertaking new investments, is the financial factor, namely the issue of obtaining funds for
the implementation of planned activities. In many cases, the financing of new projects with only own capital is insufficient, and entrepreneurs then resort to external forms of raising capital. Unfortunately, due to the specific nature of business activity of enterprises, their availability and possibility of using financial resources from external sources is limited.
Therefore, financial institutions such as guarantee funds try to fill in a specific financial gap. Their purpose and character of the measure allows for granting support to enterprises which have no chance to take advantage of e.g. bank credit or other forms due to the
strict requirements imposed on them. When granting financial support to enterprises in the form of guarantees, these funds are guided not only by the development of the SME sector, but also by the development of the region in which they operate.
The analysis of the functioning of the funds showed how important their role in the system of supporting entrepreneurship in Poland is. Therefore, it is important to undertake such actions that will be focused on the development of these institutions, which may translate into regional and national development.
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