Obtaining financing in times of pandemic

The COVID-19 pandemic, as well as subsequent lockdown, harmed entrepreneurs worldwide in various ways. Closed borders brought import and export of goods to a halt, changing exchange rates radically influenced profits, and financial problems of individual customers forced them to reduce spending on luxury goods, instead focusing on the most basic needs. Cancelled contracts, suspended public orders, as well as almost complete lockdown of hospitality and tourism industry, resulted in unprecedented consequences which apply to virtually every branch of industry.

This environment allows only for survival of the fittest – the ones big enough to compensate for losses, or the ones who can use their knowledge and resources to adapt to new reality quickly. A fundamental requirement for survival is financial stability combined with easily accessible funds. This is what makes business adaptive and competitive. That is why companies still enjoying profits should not use the pandemic as an argument to refrain from any development of the company. Instead, they should focus on cost optimalisation while still developing. On the other hand, companies in financial trouble should achieve thorough knowledge regarding alternative, sources of funding, such as preferential loans available within the Financial Shield package.

What is public funding?

With regards to entrepreneurs and other private entities, public funds can mean any type of repayable, partly repayable, or non-repayable financial assistance granted on a more preferential basis than in market reality. This assistance includes grants, subsidies, and liquidity loans. Public funding is an essential part of the Anti-Crisis Shield, a Polish governmental support package introduced as a result of the pandemic. The first version of Shield was introduced on 1 April 2020, and from its very beginning was conceived as overarching support of Polish economy, employers and employees suffering as a result of the pandemic. Currently, Polish government works on the Shield 6.0, which should further broaden a scope of industry branches eligible for public support to 40, with monthly sum of all financial support solutions amounting to 4 billion PLN. Until now, financial support distributed through the Shield amounted to more than 150 billion PLN.

This amount includes:

-60,8 billion PLN distributed through the Polish Development Fund (Polski Fundusz Rozwoju, PFR)

-26,8 billion PLN distributed through Polish Ministry of Family and Social Policy,

-23,9 billion PLN in preferential loans for SME sector,

-17 billion PLN worth of social insurance exemptions,

-14,4 billion PLN in loans for large and medium companies,

-5 billion PLN for idle time benefit,

-1,13 billion PLN of EU funding for SME sector,

-312,9 million PLN of solidarity surcharge.

Operators of public funding include Polish tax authorities, the Social Insurance Institution, regional authorities, the PFR and all sorts of trust funds using their own funds, as well as additional funding from Polish state development bank (Bank Gospodarstwa Krajowego, BGK), which amounts to additional 40,06 billion PLN.

Why public funding matters

In times when most funding products and services offers are very similar, it all comes down to costs and availability of funds when making the right decision. In both these aspects, liquidity loans and government-funded investment loans have the most to offer.

These two types of funding are inexpensive, as there are no costs related to processing of a credit application, and no commission fee whatsoever. Additionally, interest rates are extremely low, ranging from 0% to 4% per year, depending on a particular fund. In comparison, interest rates offered by banks amount to at least 6%, sometimes reaching up to 10%.

Loan agreements are fairly straightforward and include thorough explanation of terms used in their texts, making them easy to understand. They are devoid of any legal loopholes or possibly dangerous provisions.

Funding is provided by a direct transfer to bank account of a company, which should occur no later than in 1-2 days after conclusion of an agreement.

It is worth mentioning, that costs borne in connection with the loan granted through public funding are in terms of accountancy considered a cost of a business activity and can be listed as such in accountancy documents of a company.

Availability more important than ever

Current market situation is extremely dynamic and demands from entrepreneurs an ability to react to needs of customers swiftly. Apart from the pandemic, any company must take into consideration market tendencies, ever more rigorous quality demands related to social responsibility and ecological issues, as well as many other factors which ultimately determine, whether a company is competitive or not. Each of these changes result in additional costs, which often have to be covered using external funding.

Bank loans were until recently the best, traditional way of obtaining such funds. However, a recent rise of prices, more strict bank regulations and aggressive policies forced many people to look for a new, more easily accessible form of funding. Public loans are the answer to these needs.

Accessibility of such loans is obvious as soon as we look into regulations on excluded branches of business. Apart from alcohol and tobacco production, fuel and mining industry, weapon industry, pornographic industry and shipyards, no branch is excluded in its entirety. Each application is analysed individually. Another crucial aspect of public loans is the fact that it can be used to finance start-up companies, which are often excluded in banking loan systems due to their lack of evaluable financial history. Instead of analysing the past, administrators of public funds focus on the future – applications of start-ups are evaluated based on their ideas, financial forecasts, and sometimes even based on an overview of a particular social group or area, which would require activation through financing of new undertakings.

Another substantial argument in favour of public loans is their straightforward, fast analysis procedure. It is much simpler than in case of bank loans, and most commonly it is based only on analysis of current evaluation period (n) and the period immediately before it (n-1).

Public funds do not require drafting of extensive and expensive business plans, relying instead on short descriptions of planned undertakings and simple financial forecasts.

Looking ahead

While applying for a public loan we must keep in mind, that the operator of public funds will always evaluate credibility of our company, for example by analysing entries in online debt registries. This way, operators can choose safe debtors which will not cause problems within their debt portfolio. Every company should therefore care for his credit history, which is, in fact, its solid investment in future stability. Market of the future will require from us constant changes and adaptation, and those who will stand still will actually go backwards. Companies that cared for their credibility before the crisis have bigger chance of retaining stability and may get out of current difficult situation even stronger. At the same time, those who were found unprepared for the crisis may now fail to comply with public funds conditions and face even more serious financial problems.

It would be a great New Year resolution to use every financial surplus of 2021 to build strong portfolio of assets and to repay old debts. Combined with timely repayment of current bank debts, it will prepare us for any market surprises of the future.

Author: Jarosław Gierszal
18.12.2020

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