What Should We Choose: Investment Credit or Public Loan

The level of indebtedness of Polish entrepreneurs is constantly growing. However, this tendency should not be considered as the problem. Most loans are taken out for investment purposes and to support the development of business. The growing investment potential of Polish entrepreneurs transfers directly into the growth of our country’s GDP.The most important investment objectives include purchase of new machines, cars and other fixed assets, modernization of the production line, as well as the purchase of premises where services or trade are carried out. The repayment of bank loans taken by Polish entrepreneurs exceeds 85%. This means that the vast majority of Polish entrepreneurs has a plan on how to pay off the costs of the incurred debt and knows how to turn over these funds so that the loan taken out in the bank repays with measurable profits for the company.Nevertheless, most customers analyze thoroughly the possibility of obtaining a loan and its profitability. The costs of the bank loans for companies – both investment and revolving ones, are noticeable especially until the investment objective starts to be returned. The smaller the total cost of the loan and its effective annual percentage rate of charge (APR), the easier it is to obtain benefits as well as to make the decision to incur liabilities.

There are several factors that make the bank loan offer profitable. Entrepreneurs more often make a detailed analysis with a help of licensed financial advisors, in which one should take into consideration such factors as: total interest rate per year (margin plus WIBOR interest rate), bank commission for granting the loan, early repayment charge, obligatory loan insurance required by the bank or the possibility of a grace period for repayment of capital. Each of the above-mentioned components is connected with a specific rate of fees imposed by the bank. Bank offers for companies are characterized by a large price range. The reason is that each bank has its “target” clients and certain expectations towards the potential borrower. This is due to the repayment of liabilities by customers. Briefly speaking – the more reliable the customer is for the bank, the better the offer can be expected. Receiving a favorable offer is influenced by positive history of repayment of previous liabilities incurred by the borrower in banks, high turnover of the company, favorable prospects for new investments, as well as income and a company’s maintenance on the market.

A generally binding margin for business clients ranges from 2 to 4% per year. In addition, there should be added the WIBOR interest rate at the currently applicable rate of 1.72% per year. Moreover, banks may add a fee for granting the loan, for its early repayment and loan insurance. Therefore, when calculating the effective annual percentage rate of a bank loan (APR) per year, an annual expenditure of 6-8% on the amount of requested loan should be expected.

When comparing bank offers to a public loan, it should be taken into consideration that public lending institutions – Funds – are not intended to make a profit but to support. The entities providing financing are supposed to support entrepreneurship with low-cost instruments which is their primary objective. Therefore, the fees charged by given Funds are highly preferential for the entrepreneur, as well as their loan is characterized by a number of benefits.

The interest rate on the public loan is about 2% per year – Funds do not charge a commission for its granting and early repayment. Moreover, there is not added the WIBOR interest rate because the loans come from the state budget. Therefore, the APR is approximately 2% per year.

In order to illustrate the true benefit for the borrower, it is necessary to base the comparison of both instruments on the sample loan amount. For example, a company applying for a PLN 100,000 net loan, with the total cost of a bank loan in the 5-year scale, assuming APR at 7% repays in total, including the capital, approximately PLN 150,000. For the comparison, the client would gives back in total PLN 110,000 to the institution which grants a public loan with APR at 2%. In the scale of the entire loan period, the entrepreneur saves PLN 40,000 from every PLN 100,000 borrowed from public institutions granting loans. Moreover, to meet the expectations of entrepreneurs, the loan granting institution allows up to 6 months grace period for repayment of capital. It means that you can get six months which is a period for adopting a new investment and getting benefits from it. Therefore, the first payment of the full installment applies to the borrower only after 6 months from the moment of obtaining the funds from the loan.

Summing up, a public loan is currently the most advantageous instrument for entrepreneurs to finance current investments. It is a beneficial alternative to the bank loan which as the  commercial offer primarily has to generate profit, as opposed to public funds which the main purpose is to support entrepreneurship. Nevertheless, both financial instruments have their group of recipients and are profitable for entrepreneurs – depending on their current capabilities and needs.

Author: Jarosław Kruszyński