What kind of financing does the German SME sector need today?
It is important that the issue of financing the SME is approached holistically. Thus, from our point of view, all extremes should be avoided:
With pure equity financing, family-run SMEs are usually unable to adequately exploit growth potential or necessary steps towards change. Lack of competitiveness could be the medium-term consequence.
From a risk management point of view, exclusive debt financing via loans should also be rejected in the light of the developments surrounding Basel III, especially if, as is still frequently the case, the relationship is with a house bank. Recent experience has shown that some major banks are eliminating entire industries from their portfolios, lumping together companies with poor credit ratings as well as companies with good credit ratings, and that savings banks and cooperative institutions are also tightening credit limits.
Connection tranches for standard mezzanine programs are no longer available, at least in standardized form. Individually, however, there are still a number of investors in mezzanine capital.
From this perspective, modern corporate financing that also takes into account the aforementioned risks must include all suitable financing options — including alternative financing channels — in the assessment. Depending on the case, a corporate bond or promissory note loan can be incorporated into the liability-side debt financing structure alongside classic bank loans, especially as overdraft facilities in the event of fluctuating capital requirements. However, how much debt capital the liabilities side can tolerate must of course be assessed against the background of the company’s equity capital resources or intelligently constructed mezzanine capital.
The first thing to say is that bank financing should not be demonized. It is and remains an important part of corporate financing. However, in order to reduce dependency on the bank (and thus also to curb the increase in its increasing controlling requirements), a non-bank financing channel should also be used as a complement.
In particular, the corporate bond modelis available for this purpose. In contrast to external issuance, in the case of (genuine!) own issuance, the entrepreneur can design the bond in such a way that it can be issued on the market independently of banks. As an alternative to the bond, promissory note loansare also(e.g., mezzanine capital purchased by one or, in some cases, several investors, freely agreed between the company and an investor (e.g., insurance company, pension fund, family office, etc.), provided it is not arranged by a bank. Furthermore, selected investors still provide medium-sized companies with individually tailored mezzanine capital. Here too, however, it is important to consider the overall mix in terms of return and risk.
It is already more important than in the past for CFOs to obtain information and ideas from non-bank corporate finance houses in addition to bank contacts — even if it may only serve the purpose of challenging the bank opinion. Care should be taken to ensure that the advisor, whether from the bank or from non-bank investment houses, follows the holistic approach mentioned above. The aim must be to identify any balance sheet “construction sites” that may exist or to prevent them from arising as a result of unilateral financing measures. In addition to corporate finance advisors, stock exchanges are now certainly among the service providers that show entrepreneurs general ways to obtain financing.