Traditional financing instruments that previously characterized the German SME segment, such as loan and supplier financing, have developed by leaps and bounds due to the increased risk requirements of the international capital markets and the greater emphasis placed on the individual risk profiles of banks. In practice, we are seeing an increase in the number of capital market-based financing options and new financial market institutions for the broad SME segment. Although this development has been sluggish to date, the trend is starting to accelerate. Size-based restrictions as a reason for the strong SME reliance on bank loans are becoming less of an issue as the volumes required for capital market products decrease.
The changing face of Germany’s financial system – an opportunity for SME financing
Although there is proof that direct market relationships between companies and lenders – such as households and institutional asset managers - are becoming increasingly important, intermediaries such as banks, insurance companies and private equity funds – which use third-party funds in order to acquire receivables from third parties, in turn – are not set to see their role in the process decline. The misleading use of the term “disintermediation” often promotes this assumption. Nevertheless, effective market access still requires relationship-based intermediation, and banks will continue to use their most important informational asset, namely their customer knowledge and ties, in the interest of the latter.
The structural change in the German financial system will not jeopardize the partnership between the financial sector and SMEs. Long-term contractual relationships will continue to form the basis for relationship-based banking business in the future. After all, the fact that banks are using ABS techniques, for example, to exploit the international capital market to the benefit of the German SME sector shows that, if anything, they are increasingly acting as a financing bridge between SMEs and the capital market. This means that there is more of a trend towards a situation in which market-based financing instruments complement traditional debt financing methods, as opposed to a situation in which one method poses a hurdle to the other.
SME practice has shown for some time that relationship/Hausbank-based financing does not necessarily oppose market-based/“anonymous” financing some time ago, although capital market and financing theory still asserts the contrary in many cases. Quite the opposite: In the strategy of many SMEs, a diversified financial approach is extremely closely linked to the respective SME shareholder structure and the equally diversified SME product portfolios and markets. As far as the SME business is concerned, too, banks are increasingly moving away from a purely product-based approach to targeting clients in a solution-oriented manner by means of a relationship-based approach. It is only by means of the synthesis of these financing forms, true to the motto “Together we are stronger”, that the typical SME problems can be solved – from the lack of equity to succession planning, the diversification of borrowing, risk management and the challenges posed by globalization. This study shows that not only traditional financial intermediaries such as banks and insurance companies, but also the new types of financial intermediaries such as private equity companies, are striking a happy medium between the stereotypes of capital market-oriented and bank-oriented financing.
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