ALTERNATIVE FINANCING FORMS
FOR ENTREPRENEURS AND INVESTORS

3 questions to smart minds

What kind of financing does the German SME sector need today?

For this 3 questions to H. Stichlmair

SCALA Corpo­rate Finance
Photo: H. Stichl­mair | SCALA Corpo­rate Finance
18. July 2012

German SMEs are incre­a­singly getting fewer and fewer loans from banks. Basel III will make things even more diffi­cult for them. What alter­na­tive finan­cing can entre­pre­neurs use to realize their growth and expan­sion plans? Is it possi­ble to tailor finan­cing? How and where can decision-makers get reli­able guidance?


For this 3 ques­ti­ons to Mana­ging Part­ner at SCALA Corpo­rate Finance in Munich

1. What kind of finan­cing do German SMEs need in this day and age? What instru­ments does he have at his disposal?

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.

2. Is there non-bank finan­cing that can be ‘tailo­red’ for entrepreneurs?

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.

3. How and where can entre­pre­neurs and CFOs get reli­able orien­ta­tion and information?

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.

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