SMALL BUSINESS FINANCING IN CEE - THE CASE OF POLAND

Robert Rumiński University of Szczecin

Faculty of Management and Economics of Services Szczecin, Poland

SUMMARY

This paper is concerned with SMEs in developing economies. The principle topic focuses on the development as well as financing for micro, small and medium enterprises in Poland - one of the fastest growing EU economies and the 9th largest country in Europe. The issue of growth and development perspectives of small businesses, their role in growth creation in Poland, as well as the access to financial resources are discussed. Special emphasis is put on direct funding to SMEs and their access to bank loans. Moreover, macro- and microeconomic determinants influencing the development of SMEs, influence of the recent financial crisis on the growth of enterprises as well as factors conditioning business activity in Poland are taken into consideration. Poland is seeing positive rates of development despite the economic downturn and its high level of competitiveness, strong economic fundamentals and high flexibility will allow to benefit from the global recovery over the next few years.

Keywords: SMEs development, Polish economy, entrepreneurial finance, bank financing,

Contact Details: Home Address: ul. Czesława 1B/6, 71-504 Szczecin, Poland

robertruminski@wp.eu mobile:(0048) 501 198 030

INTRODUCTION

The financing of small and medium enterprises (SMEs) has been a subject of great

interest both to researchers and policy makers due to the significance of SMEs in free

market economies around the word. They constitute the dominant form of business

organization, accounting for 95-99% of enterprises depending on the country. Small

businesses are particularly important for bringing innovative products or techniques to the

market. They play a vital role in both developing and well-developed economies and are

perceived as those creating new jobs and enhancing competition. They are recognized as

an engine of economic growth and a source of sustainable development. Within this

sector micro and small-enterprises are of special importance and they are considered as

the cradle of entrepreneurship, particularly in environments facing high unemployment.

Stable and fast development of SME's is not possible without relatively easy access to

financial sources. Their small turnover does not allow to self-finance their activity by

reinvesting profits. Therefore, SME's are forced to use alternative financial instruments

provided by financial intermediaries (8).

In an analysis of the access to external sources of financing one may use the concept

adopted by the World Bank (22), according to which a wide access to external sources of

financing means there are no price and quality barriers in the use of financial services,

while funds are awarded on the basis of a real credit rating of a business entity and it is

done in a strictly competitive environment with the application of the highest financial

standards and available technologies.

The problem of access to external sources of financing for enterprises can be presented as

follows (1,2):

• physical lack of financial products offered by markets, or their limited number,

• complicated bureaucratic procedures, resulting from the multiplicity of documents

required by financial institutions,

• high costs of obtaining financial support, disproportional to the actual degree of

risks that enterprises represent,

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• infrastructural deficiencies causing uneven distribution of capital, concentrating

its activity only in capital urban centers,

• inadequate legal solutions limiting financial markets development.

A correct diagnosis and removal of barriers that enterprises face in acquiring external

sources of financing constitute a major challenge for state authorities and other

organizations supporting the sector. It is of particular significance in developing

countries, where the practices in use sometimes differ from the standards and norms

adopted by developed countries, and where access to funds is a problem with which

enterprises need to struggle in their everyday operations.

THE ROLE, STRUCTURE AND DEVELOPMENT PERSPECTIVES OF THE POLISH SMEs

SMEs have a special place in Polish history. Transformation of political and economic

system of Poland in the late 80' heavily influenced the formation of private sector. At the

time of restructuring the national economy the importance of small businesses grew

significantly(9). The process of restructuring included the transformation of centrally

planned economy into free market economy accompanied with macroeconomic changes

related to economic growth, replacement of the command mechanism with market

mechanism and privatization. Many changes and processes that took place in large

companies would not be possible without fast development of SMEs. A fast development

of private small business sector was conducive to the development of competition and to

the process of dynamic privatization. SMEs brought the benefits of flexibility and

responsiveness as well as innovation and stability to the local economy. Entities of that

size became one of the key elements of the new Polish economy and are currently a

driving force and a key part of the entrepreneurial landscape in Poland. Moreover, the EU

accession has brought more stability, greater market access and an unprecedented level of

financial assistance for development of Polish SMEs.

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At the end of 2009 the number of non-financial enterprises in Poland amounted to 1.674

m. In relation to 2008 the figure demonstrated a decrease by 6,4%. SME's constitute a

great majority of that number, i.e. 98.9% of the total. Microenterprises form the most

numerous group among them, constituting 95.9% of the entire population. The biggest

number of companies in Poland represents a commercial sector (30%), followed by

construction companies - 13.5%, industrial ones - 11.1%, companies conducting

scientific and technical activities - 10.9%, transportation enterprises - 7.9%, companies

providing medical care and social aid - 7%. The remaining sectors do not exceed 5% of

the share in the total number of enterprises. 52% of the total number of the employed

work in small enterprises, out of which 40% in microenterprises. Whereas medium

enterprises provide employment for less than 19% of the total number of the employed

(12,16).

The structure of enterprises in Poland is very similar to the entire population of

companies in the EU, where the share of SME's amounts to 99%. However, Poland

differs in that it features a higher share of microenterprises, i.e. 95.9% in relation to the

EU index of 91.8%. The market share of SMEs is very similar in Poland and in the entire

EU. The importance of micro-enterprises in Poland is slightly higher than in the EU states

- a statistical enterprise in Poland employs 2,2 people, while in the EU - 2,0. Micro-

enterprises have a slightly higher share in the number of companies and gross added

value of enterprises and a markedly higher share in turnover and the number of

employees. Despite this, the productivity of micro-enterprises in Poland - measured with

a gross added value generated by one worker - constitutes approximately one third (31%)

of the results achieved by the EU companies and slightly more (41%) acc. to turnover

figures (revenue) per person. The pace of changes has improved - all of the above-

mentioned figures for micro-enterprises in Poland, except remuneration, are growing

faster than the average in the EU (16).

Comparing companies on account of the length of their existence, one may conclude that

two thirds of them have been operating for longer than five years. In late 2009

approximately 13% had been in business for no longer than one year. A majority of

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newly-established entities (99%) were microenterprises. Out of all the enterprises it is

small companies that most frequently decided to switch their business profile in order to

maintain and strengthen their market position.

The economic slowdown in 2009 resulted in decreased investment dynamics in SME's by

over 6%. Companies based in large urban agglomerations of the northern, central and

south-western parts of Poland (the voivodeships of Mazovia, Silesia and Pomerania)

made the largest investment outlays (14,17). In the course of 2006-2009 the significance

of own funds had been growing in SME's investment financing (a rise in the share of that

source of financing from 63,4% to 64,8%), the significance of budget funds (from 1,9%

to 3,3%) as well as foreign funds (from 7,5% to 8,2%) and other sources (from 2,8% to

3,8%) recorded an increase as well, whereas the participation of national credits and loans

was decreasing (from 21,8% to 18,5%). Own funds are committed to an investment

financing on the grounds of an economic potential which correlates to the size of an

enterprise. The larger the enterprise, the higher the committed funds. SME's allocate the

most funds to investments, as well as buildings and structures (51,6%). The smaller the

enterprise, the larger the share of outlays on buildings and structures (small: 57,1%,

micro: 52,6%, medium: 48,2%) and on means of transport (micro: 26,6%, small: 13,9%,

medium: 12,2%). It results from a lower economic potential of small entities and the

scale of costs involved in investments in this investment category (14,16).

D Diagram. SMEs Investment Breakdown in 2009 miscel

Source: based on the Central Statistical Office (GUS) data http://www.stat.gov.pl/gus/index_ENG_HTML.htm

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In the course of 2010-2011 entrepreneurs refrained from undertaking any major

investments, which was the reason of, inter alia, the concerns for the economic future of

Poland and of the euro zone. In the meantime companies are economizing, and their

credit rating and liquidity are improving. It was observed that enterprises were also

unwilling to take advantage of external sources of investment financing, which was

manifested by their allocating first of all their own funds for that purpose - 92%. The

second source of financing that companies preferred were bank loans - 46%, the third

one was leasing - 32% (14,16). The Polish SMEs sector is still growing relatively fast. It

may be expected, that the trend of development of SMEs will be similar to the one which

can be observed in more developed countries.

THE GLOBAL CRISIS AND THE POLISH ECONOMY

The recent global crisis has hit practically all countries in the world - both developed

economies and high-growth emerging economies alike. It has affected all areas of

economic life due to the complexity of the current financial systems and strong links

between their particular elements as well as their role in stimulating demand and

economic activity.

In 2008 the financial crises began to affect rapidly growing Poland's economy. It

reflected in deteriorating GDP growth prospects (substantial slowdown of the economic

growth), reduced bank lending activity and limited access to external financing. It has

become the key reason for the economic slowdown observed in Poland since mid 2008.

After Poland's GDP increased by almost 3% in the fourth quarter of 2008, there was a

further slowdown of the Polish economy during the first quarters of 2009. This slowdown

mostly stemmed from waning demand and the decline of domestic demand was alleviated

by the inflow of EU funds stimulating investment and by the depreciation of the Polish

currency (PLN) against the EUR. In 2009 investment and domestic demand decreased by

0,3% and 0,9% respectively (15). Nevertheless, according to the national Central

Statistical Office data (3), Poland was the only EU Member State that recorded a positive

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GDP growth at a rate of 1,7% in 2009 (compared to a considerably higher economic

growth rate in 2008 which amounted to 5.1%) (16).

The Polish economy has faced a challenging external environment, in terms of both

prospects for exports and external funding. The impact of the slowdown in global and

European trade on the Polish economy has been fairly limited. The reason is that Poland

is much more reliant on its domestic market than other countries in the region. That

significantly helped in sustaining growth in the crisis. The Polish market is as large as the

rest of the Central European countries together. The biggest threat for Poland was a

possible withdrawal of foreign capital and problems with liquidity of the financial sector.

In 2010 there was a GDP growth of 3,9% and in 2011 - 4,3% (26). Despite this

challenging environment, Polish SMEs started to bounce back. In terms of economic

growth, unemployment, inflation, consumption, the exchange rate and exports, the

prospects for the next 2 or 3 years look good, although the growth rate will continue to be

below the potential. An increase in the budget deficit and public debt has eventually

forced the government to take definite budget restructuring and financial measures.

In December 2011, there were initial signs of a new credit crunch within the eurozone,

with growth in credit falling and bank funding being withdrawn from central Europe.

Real GDP growth in 2012 - 2013 will depend largely on the economic situation in other

EU Member States and will differ significantly between Member States, but the Polish

economy is set to grow at a high rate, despite many problems that may still appear.

FACTORS CONDITIONING BUSINESS ACTIVITY IN POLAND

Nearly 70% of entrepreneurs describe the conditions of conducting a business in Poland

as being dificult or very difficult. They chiefly complain about exceedingly complicated

administrative procedures, vague regulations of the law and complicated fiscal system.

They are reluctant to take advantage of external means of financing for their investments.

In their view the easiest way is to use leasing, whereas obtaining EU funds can be a

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highly difficult feat. It is worth pointing out that small and medium entrepreneurs have

trust in financial institutions and it is chiefly from those institutions that entrepreneurs

obtain all the necessary information with respect to acquiring adequate financing. A great

majority of companies expects financial institutions to assist them in going through the

procedures required to obtain financing, as well as consulting services with respect to

choosing the form of financing (14).

Diagram. The Evaluation of Conducting Business Activity by SMEs in Poland (%)

very easy

Source: based on TNS Pentor Report for Europejski Fundusz Leasingowy S.A. Warsaw 2011

The data presented above constitute a confirmation of reports prepared both by the

organizations associating entrepreneurs in Poland, as well as by international institutions

conducting research on enterprise operation in the world. "Doing business" drawn up by

the World Bank (27) can serve as an example of such a report. Its last edition ranked

Poland at the 70th place out of 183 countries surveyed with regard to evaluating the

conditions created to entrepreneurs. The result must be seen as very poor. Apart from a

few countries in Western Europe, countries of Central and Eastern Europe rank high in

that listing, namely Lithuania (23rd place), Latvia (24th place), Slovakia (41st place),

Slovenia (42nd place). Poland's low position results from a general evaluation of the

conditions carried out by the World Bank, however it is worth scrutinizing what the

evaluation comprises. What is important is that out of all the categories the possibility of

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Polish entrepreneurs to acquire external financing was deemed to be high (Poland ranked

15th globally). The World Bank very highly evaluated the transparency of the law

regulating contracting of obligations by companies as well as the accessibility of

information on financing.

Poland fared much worse in other categories. While evaluating the difficulties in setting

up a business the focus was on lengthy procedures at offices, while the assessment of

fiscal policy towards entrepreneurs concentrated on the scale of various types of tax the

companies pay into the state coffers (tax obligations amount to 42% of companies' profits

per annum).

Despite such serious obstacles entrepreneurs manage to overcome the difficulties and

develop their businesses. A large proportion of entrepreneurs (42%) describe economic

standing of their companies as good, or very good. A significant percentage (39%)

recognizes the situation as being average. 14% claim that the situation in their companies

is bad, while 4% perceive it as very bad. The largest percentage of businesses which

favorably assess their economic standing were medium enterprises. Among micro-

entrepreneurs the percentage of those recognizing the situation to be very good was the

lowest (14).

Among the most serious barriers that small and medium entrepreneurs have to battle three

fundamental areas emerge (4):

1) complicated administrative procedures (35% of responses),

2) vague and non-cohesive regulations of the law (33%),

3) high taxes and insufficient transparency of the state's fiscal system (29%).

9

Diagram. SMEs Financing Barriers in Poland

lack of support from government

negligence of contractors

shortage of labor

bureaucracy

lack of funds for development

low demand for products and services

competition

lack of financing opportunities

hight cost of external financing

high labor costs

poor tax system

unclear law

complicated administrative procedures

Source: based on data derived from Centrum Badań Marketingowych INDICATOR, Finansowanie przedsiębiorców przez banki w 2010 i 2011r. (Report 2011)

High labor costs in Poland were a significant barrier that SME's mentioned (16%). Other

factors listed included costs of financing that are high in SME's view (14%), as well as

lack of access to the sources of investment and operations financing (ever tenth

respondent).

It needs to be pointed out that the evaluation of barriers differed depending on the size of

an enterprise. The larger the company, the more problems it encounters with unclear and

non-cohesive regulations of the law. Every fourth micro-entrepreneur mentioned this

barrier, while in case of small and medium enterprises the figure reaches 40% (4, 28).

FINANCING SMEs DEVELOPMENT IN POLAND

There is a large interest in understanding the access of SMEs to finance, particularly in

the process of financing small entities. The financing patterns across countries are

sometimes vague. The issues related to the process of SMEs' external financing as well

5%

5%

6%

• 6%

- 7%

8%

9%

11%

14%

16%

29%

3%

35%

10

as their influence on capital structure are extremely important to small, fast developing

firms.

Commercial banks are one of the most important financial capital providers to SMEs

among different financial intermediaries offering capital for development. Small firms

tend to be bank-dependent for external funds. The overwhelming majority of external

financing for the SMEs sector within the European Union (including Poland) is provided

by banks (19). The banking system for the financing of small enterprises has always been

characterized by a short-term approach to secure lending and minimize risk. The bank

relationship is extremely important - both for enterprises and banks (7). The proper and

smooth financial cooperation between small firms and banks is a key element of their

corporate financial management. Banks generally show lower interest in appraising

projects and lending to start-ups and small businesses (6).

The confidence in the banking system has recently been undermined due to the world

financial crisis. The main threats to the Polish economy were the following:

• dependence of the exchange rate of the national currency on short-term

speculative investment,

high public debt,

• a major dependence of production on imports.

As crisis developed, other factors gained importance, e.g. reduced bank lending,

depreciation of the PLN and financial problems encountered by SMEs. Nonetheless, the

situation of the Polish economy was relatively positive, as compared to other European

countries. The mild influence of the crises on the Polish economy, in comparison with

other Central and Eastern European countries, is related to the following developments

(22,25):

• lack of problems in the banking sector,

weakening of the PLN,

• relatively flexible labor market,

• significant inflow of the EU funds.

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As a result of the crisis the system of financing SME's collapsed, on top of that,

companies had to struggle with a serious deterioration of market conditions. Whereas

currently they need to battle the consequences of the crisis, namely, inter alia: lower

purchasing power of money, restructuring, decreased ability of innovating and reduced

financial outlays on R&D. A limited access to financial sources, which also results from

the agreements made in Basel (Basel III), constitutes a major obstacle for SME's to

emerge from the crisis (21). These arrangements - inter alia, a decision on tightening

credit money distribution - caused the implementation of stricter procedures of granting

credits by banks. The problem of financing SME's is in the focus of attention of both

organizations associated with the EU, OECD, as well as those functioning in Poland.

Those organizations are also considering whom an investment risk ought to be imposed

on.

Despite the fact that interest rates fell in relation to last year, banks demand a larger

number of documents ascertaining a borrower's credibility, a higher borrower's own

contribution and a higher collateral, and not all the companies are able to fulfill those new

conditions. Consequently, both banks and entrepreneurs lose customers and profits,

because financial institutions could provide credits, if it were not for Basel III.

SME's in Poland utilize external sources of financing investments only to a limited

degree. They mostly finance investments from own sources (52% of companies). When

defining reasons for this state of affairs, 11% of entrepreneurs from that sector point out

to their fears of high demands posed by financial institutions, 9% mention complicated

and time-consuming procedures, while another 7% - high costs of obtaining capital. The

structure of the sources of SME's financing is undergoing certain dynamics. To compare,

in 2009 (similarly to previous year) two thirds of SME's investment outlays were

financed with own funds (64.8%), nearly one fifth was financed with national credits and

loans (18.5%), and 4.6% from foreign ones (16).

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Diagram. Sources of Financing in Poland - Small Enterprises

own capital

credit lines in PLN

family loans

leasing

personal credit lines

EU funds for SMEs

not using and not going to use

not using, but is going to use

using

20 40 60 80 100 120

Source: based on data derived from Centrum Badań Marketingowych INDICATOR, Finansowanie przedsiębiorców przez banki w 2010 i 2011r. (Report 2011)

Small enterprises chiefly finance their operations with own funds (94%), a PLN credit is

used to a smaller degree (48%) as are family loans (35%). The situation is similar in case

of medium enterprises, where own sources remain the main source of financing

operations (87%), along with PLN credit (63%). Leasing constitutes the next most

popular source of financing (40%).

Diagram. Sources of Financing in Poland - Medium Enterprises

credit lines in foreign currencies

family loans

EU funds for SMEs

leasing

credit lines in PLN

own capital

76 6 17

not using and not going to use

not using, but is going to use

using

0 20 40 60 80 100 120

Source: based on data derived from Centrum Badań Marketingowych INDICATOR, Finansowanie przedsiębiorców przez banki w 2010 i 2011r. (Report 2011)

0

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If companies decide to make use of external financing of their development, they

consider leasing and bank loans to be the most easily accessible sources. With regard to

bank loans, 49% of enterprises express such an opinion (14,16).

As the diagram demonstrates, the use of the EU funds constitutes a relatively small share

as one of the methods of financing business activity (development). In case of small

enterprises, 7,7% of the population selects this form of financing, whereas nearly 22% of

medium enterprises chose it (5).

Diagram. The Use of EU Funds by SMEs in Poland 100%

80%

60%

40%

20%

0%

9 >2.3% 78.3%

1 1 21.7% 1 Small enterprises

Medium enterprises

Yes No

Source: based on data derived from Centrum Badań Marketingowych INDICATOR, Finansowanie przedsiębiorców przez banki w 2010 i 2011r. (Report 2011)

Considering the form of financing most frequently used by companies - bank loan - it is

worth noting that in 2010, just like in 2009, a decrease in the value of credits to

businesses was recorded. Despite banks gradually softening their crediting policy towards

enterprises, any increase in crediting activity was limited by a low demand for this form

of financing, which resulted from the insecurity of business operations. Consequently, the

value of credits for SME's fell in 2010 by 1,2% in comparison to a drop of 3,3% in 2009

(in 2010 the value of credits in this category decreased by twice less than in the previous

year). The value of credits in the banking sector at the end of 2010 amounted to 248,9 m

PLN, i.e. 15,4% GDP (vis-a-vis 16,5% GDP at the end of 2009) (16,17).

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On the one hand, banks have implemented stricter crediting procedures, while on the

other hand SME's want to make up for the losses incurred in the previous lean years. In

spite of the obstacles described here, the Polish sector of SME's is slowly being restored.

Nearly three quarters of small companies recorded a profit in 2010 - it is a better balance

than the one recorded in 2009. Every sixth company experienced payment backlog. In

2011 nearly a half of small enterprises expect to have generated a profit at the same level

as in 2010. The fact that one third of the companies anticipate a decrease of their profits

this year instills less optimism.

In the first quarter of 2011 a large drop was observed in the use of loans offered by banks,

however, forecasts for the next half of the year are auspicious (23). Own funds continue

to be a dominant form of financing. Loans denominated in the zloty (PLN), family loans,

leasing schemes and personal credit lines are popular as well. Currently nearly two fifths

of small enterprises take advantage of an overdraft in a vista (current) account or a debit

balance, while nearly one sixth makes use of operating credits.

Banks constitute the most important source of external financing for Polish entrepreneurs.

No external source of financing exists in Poland - also a public one - that would offer

them larger support. However, there is a series of threats which may limit that stream.

A choice of a bank by small entrepreneurs depends chiefly on: recognition of individual

needs and preferences of a client, speed and form of settlements, service quality and

flexibility, offer range as well as amounts of commission and charges.

The facts that have the greatest impact on the selection of a bank by companies include:

functionality of electronic banking system, quality and competence of a bank's personnel,

service quality and flexibility, as well as the quality and availably of a credit offer.

Two fifths of small enterprises keep free resources in an account instead of depositing

them; an identical percentage of companies do not possess any free resources. Whereas

over one quarter of small enterprises deposits their free financial resources, which

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constitutes a significant fall in relation to the last year's figures. This year the most

popular forms of allocating free financial resources are: medium-term bank deposits

denominated in PLN (1 to 6 months), as well as short-term bank deposits denominated in

PLN (up to 30 days) (16).

Financial surpluses are allocated in a majority of cases at the company's main bank, but a

quarter of the companies also allocate their free cash at other financial institutions. More

than two fifths of those surveyed admitted that at their companies free cash is kept in a

current account, whereas nearly one third of those surveyed claim that a company has no

free financial resources at all.

The most popular channel of communication and settlements with banks is the Internet,

including home banking facility, which enables using a computer system for direct

banking transactions.

Credit Policy Towards SMEs - Current and Future Perspective

All the indications are that the policy adopted by banks vis-a-vis SME's in 2012 will aim

towards tightening crediting conditions and raising credit margin. No significant changes

in demand for credit have recently been observed, however an upsurge of demand for

short-term loans is anticipated.

In the 4th quarter of 2011 banks introduced stricter credit policy towards SME's.

Approximately 31% of banks gave such a reply with respect to short-term loans, and

about 37% with respect to long-term loans. Banks described the policy of tightening as

slight. In case of short-term loans granted to SME's, banks were expecting a lower scale

of tightening crediting conditions (18). For the first time since the 1st quarter of 2010

banks have increased margins on loans granted to enterprises (13). At the same time

approximately 24% banks declared a rise of margins for high risk loans. Stricter

conditions were also introduced with regard to a maximum loan amount as well as a

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maximum crediting period. The remaining credit conditions for enterprises have not

undergone any significant changes.

A majority of banks justified the tightening of credit policy with an increased risk related

to a forecasted economic situation, while about 18% of them defined the impact of that

factor as having been significant. A percentage of banks pointing to their current or

forecasted capital situation as the reason for the tightening of crediting policy vis-a-vis

enterprises has grown as well. Banks additionally mentioned an increase of the risk

related to the standing of the largest borrowers and a deterioration of the quality of their

portfolio of loans for entrepreneurs.

A small number of banks which softened their credit policy justified that step with an

increased demand for loans for companies. The banks which recorded an upsurge in the

demand for loans explained it with a higher demand for financing of fixed assets and

investments by businesses. 34% of banks gave such a response, while at the same time

defining the impact of that factor as insignificant. Banks recognized the tightening of

crediting conditions as the only factor reducing the demand for loans. According to the

banks surveyed, the remaining factors did not seriously affect changes in the demand for

loans among entrepreneurs.

The opinion the banks presented demonstrates that during the 1st quarter of 2012 all

categories of loans for enterprises will be subject to stricter crediting policy. The largest

percentage of banks anticipates such a change in the SMEs segment, both for short-term

and long-term loans. Banks expect a demand for short-term loans to grow in the 1st

quarter of 2012 (20).

CONCLUSIONS

Poland shows tremendous dynamics in small business development. 23 years following

the system transformation demonstrated that the Polish are a highly entrepreneurial

nation. Companies currently operating in Poland provide employment for over 6,5 m

people. As many as 7 out of 10 of persons are employed in the SME's sector. Poland is

17

no different from the rest of Europe in respect of entrepreneurship, and with regard to the

number of active enterprises it ranks the 6th in the EU.

The activity of SME's plays a fundamental role in Poland's economic development. Over

1,6 m entities of the SME sector in Poland constitute a dominant force in the Polish

economy and a source of growth, innovation, employment and social integration. The

smallest entities, i.e. micro-enterprises - usually have a limited scope of operations and

small impact on the business environment, however, their sheer number means that the

sector plays a significant role in shaping the economy. In Poland, as in the entire EU, they

generate approximately 1/5 of the added value of enterprises, while at the same time

constituting over 9 in 10 of all enterprises (96%), providing employment to 40% of

workers and to 20% of those employed in enterprises.

The characteristic feature of the Polish SME sector is a relatively low growth rate in

comparison to the EU states. Polish micro-enterprises are smaller than their foreign

partners, they employ fewer workers, obtain lower turnover and balance value. They are

growing quite quickly in comparison to the EU states, yet taking into account

considerable delays, their growth rate could be quicker and more noticeable.

SMEs depend critically on external sources of finance. Most of enterprises in Poland

currently use their savings as the main source of financing their investment. Among the

other, external sources, there are bank loans and leasing. SMEs plan their future

investments very carefully.

Conducting a business activity in Poland is difficult. Entrepreneurs encounter a series of

administrative barriers, struggling with bureaucracy and complicated, frequently

amended tax regulations, which makes running a business activity unpredictable to a

certain degree. Furthermore, the macroeconomic situation in the EU, fear of an economic

slowdown and PLN exchange rate fluctuations prevent the companies from steadily

making plans for business development and for new innovations. Apart from the

uncertainty as to the development of the macroeconomic situation globally as well as the

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barriers in conducting business activity, entrepreneurs also encounter limitations in

acquiring external sources of investment financing. Those include, inter alia, complicated

procedures of obtaining funds, fear of high costs of financing and insufficient awareness

on the available possibilities of financing business activity development.

The condition of Polish SMEs in the subsequent months will largely depend on how the

macroeconomic situation in Europe unfolds. The debt crisis of the euro zone nations

makes fear of another economic slowdown even stronger. Although Poland is not part of

the euro zone, a recession in other countries of Europe may have an adverse impact on

the Polish economy. Nevertheless, forecasts remain optimistic.

REFERENCES

1. Beck, T., Demirguc-Kunt, A., Small and medium-size enterprises: Access to finance as a growth constraint, Journal of Banking & Finance, 2006

2. Beck T., Kunt A.D., Maksimovic V., Financing patterns around the world: are small firms different?, August 2004, available at: http://www.tilburguniversity.edu/webwijs/files/center/beck/publications/obstacles /financingpatterns.pdf

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4. Czarna lista barier dla rozwoju przedsiębiorczości, Lewiatan, Warsaw, 04.2012 available at: http://pkpplewiatan.pl/opinie/gospodarka/4/_files/2011_03/clb2011_prev.pdf

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