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Micro-entrepreneurs Boost Borrowing Despite Investment Lag

FINANCEMicro-entrepreneurs Boost Borrowing Despite Investment Lag

Micro-entrepreneurs in 2023 were more likely to use bank loans. According to the Credit Information Bureau (BIK) data, the sale of loans to this group of customers increased by almost 14% compared to the previous year, and the value of the loan portfolio reached PLN 73.1 billion. However, this did not change the negative trend of low development financing. The value of the investment credit portfolio of micro-firms amounted to PLN 18.3 billion and dropped by 6% compared to December 2022. The problem of debt repayment quality also intensified. The value of overdue micro-firm credits in 2023 was the highest in five years, accounting for 18.1% of the credit portfolio. According to BIK analysts, the year 2024 will be influenced by the expectation of an acceleration of economic growth by 3%, which may stimulate the loan market for companies by 12.5%.

BIK analysts’ predictions for improving micro-business financing in 2023 have been confirmed. Despite the difficult economic situation, decreased interest rates, an economic slowdown – not a recession, and deflationary processes of PPI inflation favorably affected loans for micro-firms.

The past year turned out to be better than 2022, however, still worse than 2021. In 2023, credits for micro-firms increased in both number (13.4%) and value (13.7%). The loan portfolio increased by PLN 1 billion and reached PLN 73.1 billion. However, the quality of debt repayment deteriorated. At the end of the year, 18.1% of the value of obligations were over 90 days overdue, which is the worst result in five years.

“Various factors influenced loans for micro-firms in 2023. Negative factors include the uncertain economic situation accompanied by a high variability of the socio-economic environment, and positive factors include lower interest rates and producer price deflation (PPI). Falling fuel prices and stabilization of commodity market prices favored the financing of micro-firms. This translated into double-digit credit action dynamics and an increase in the portfolio value. It is worth noting that there is a clear relationship between the level of interest rates, or rather expectations for their future level, and the dynamics of credit action,” explains Prof. Waldemar Rogowski, Chief Analyst at the BIK Group.

The sale of loans in 2023 grew fastest in the construction (+17.1%) and service (+14.7%) sectors. Services were the largest segment of the micro-firm loan market, with a value of PLN 30.0 billion and a 41.0% share in the portfolio value. Trading was second with debt value reaching PLN 21.7 billion and almost a 30% share. The third place was occupied by production with a value of PLN 11.1 billion and a 15.1% share. Construction had a value of PLN 9.2 billion and a 12.6% share. The remaining sectors had a value of PLN 1.2 billion and a 1.6% share in the portfolio.

“The structure of loans for micro-firms reflects the structure of small businesses, which focus on services and trade. Credit action in 2023 was higher than in 2022, and service and trade companies played a major role. Fewer loans were granted to construction companies, but in their case, the dynamics of credit action growth were the highest. The Safe Credit 2% program had a positive impact on the revival in the trade, service, and construction sectors. Demand for flats and associated finishing services and renovation works increased,” says Sławomir Nosal, Head of the Analysis Team, BIK.

Micro-firms, i.e., entities employing 1 to 9 people, are the most numerous group of enterprises in Poland. There are over 2 million of them, which according to the Central Statistical Office (GUS*) accounted for 95.8% of all economic entities in the country in 2021. Their gross contribution to the Polish economy amounted to over PLN 200 billion, accounting for almost 11% of national GDP. Micro-firms employ 3.7 million people, which corresponds to 1/5 of all employees in the enterprise sector.

Loans for companies are a factor stimulating the development of entrepreneurship and economy. Thanks to bank financing, companies can invest resources in their investments, e.g., in new machines, real estate, infrastructure, and consequently, increase productivity, competitiveness, and employment in companies.

Bank loans are not commonly used by micro-firms, and their finances often overlap with the private budgets of owners. The low level of indebtedness of micro-firms is related to their market standing. The longer a company operates in the market, the greater chances it has of using a bank loan.

On average, 17% of micro-firms use bank financing. Companies with at least ten years of experience have over a 20% credit level. Firms with a 17-year history use bank loans the most, as much as 27% of them.

“The Polish micro-enterprise credit market is relatively small. The value of the entire credit action is close to the annual value of installment loans granted to individual customers, and the level of debt is less than half of the value of the cash loan portfolio. An interesting phenomenon is the fact that some owners of micro-firms, in addition to corporate loans, also get into debt as individuals, often to invest in their business. Their private loans amount to PLN 48.4 billion, of which PLN 33.9 billion are housing loans. Interestingly, these funds can also be used to finance the purchase of property intended for conducting business activities. In the sectoral structure of micro-firms using private loans, half of them are service companies. Alternatively, some owners support the development of their company by using leasing,” observes Prof. Rogowski.

The uncertain economic situation and high-interest rates discourage Polish entrepreneurs from using bank loans for investments. Instead, they often finance their projects from their own funds. Evidence of this is the record low value of investment loans granted in 2023 – the smallest in seven years. As a result, the portfolio of these loans shrank by 16% in three years – from PLN 21.7 billion at the end of 2020 to PLN 18.3 billion at the end of 2023. Among investment borrowers, those who run a service business lost the most. Some of them are looking for alternative forms of financing, such as leasing.

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