Financing study: German SMEs are growing again – but will have to expect challenges in obtaining finance in future

• Survey of around 300 mainly small and medium-sized companies
• German SMEs weathered the crisis better than expected
• 37% of companies surveyed expect to need more net finance in 2011; 61% are looking at growth issues
• 43% are finding themselves facing stricter credit clauses (financial covenants) when it comes to renegotiating their credit finance
• Long-term funding strategy, business model-based structuring and using alternative instruments are the way to secure future-proof funding

Small and medium-sized companies have come through the crisis much better than expected: many of them are even growing. To expand any further, though, they urgently need sound corporate finance, but this has become more difficult since the credit crunch. SMEs in particular can expect to face challenges obtaining finance in future. To thrive in the market, companies will need to follow three basic rules for future-proof finance: have a long-term financial strategy, ensure structured business model-based finance and use alternative financial instruments. These are the findings of a recent study entitled "Financing structures and challenges for companies in Germany" by Roland Berger Strategy Consultants.

"German SMEs have weathered the crisis better than is generally assumed," says Sascha Haghani, Partner and head of the Corporate Finance Competence Center at Roland Berger Strategy Consultants. "Many of them are even growing again." There are signs of a recovery in Germany, albeit a weak one. To turn this into sustainable growth requires sound company financing; but SMEs can expect to find the going tough. "Corporate finance has become much more complex since the financial and economic crisis," says co-author Klaus van Marwyk. The crisis has weakened businesses' ability to fund themselves from within. Falling operating earnings have reduced their reserves of cash. For the emerging recovery, they need more working capital and investment, and the finance to match. But there is only a limited amount of equity capital available for external financing in the capital markets. IPOs and capital increases can be difficult as things remain uncertain. At the same time, the banks are lending more cautiously, making access to credit more difficult.

Growth a major issue for companies

To keep on growing, companies need new capital. What is striking is that 61% of companies surveyed see growth issues as the sole focus of finance in 2010-2011, compared with just 5% who cite refinancing. 37% expect to need more finance overall, and 6% will even require much more finance overall in 2011. But nearly half (43%) of companies are finding themselves facing stricter credit terms (financial covenants) than before. There are four challenges and tasks the companies surveyed expect in the future: increasing financing volume (13%), disputes over the current credit rating (12%), refinancing as funding runs out (10%) and increasing finance costs (9%).

How to stabilize company finances

The study shows that companies can help optimize their financing terms and structures by using long-term financing strategies. Around half the companies surveyed who focused on long-term strategies said the benefits of these were good terms, a good rating, simplicity, low risk and a trusting relationship with those financing them. Companies should also base their finance on the particularities of their business models and consider aspects such as business cycles, volatility, risk structure and footprint explicitly. Structured funding increases transparency and allows for more control, making financiers more confident and reducing administrative costs at the same time. Many of the companies surveyed said bank loans were hard to come by, if they were available at all. So it makes sense for them to use alternative financial instruments to give themselves room to maneuver. Haghani says, "German SMEs should now review their financial requirements critically – and not be afraid to restructure drastically after overcoming moderate resistance."