SME financing is changing

An interview with Dr. Kerstin Wagner,

Company Account Manager for the greater Leipzig area and Saxony-Anhalt at LBBW Sachsen Bank

» Small and medium-sized enterprises (SMEs) remain the backbone of the German economy. To what extent is industry drip-fed by credit institutions? (To what extent are SMEs dependent on bank financing?)

Small and medium-sized enterprises indeed remain the backbone of the Germany economy, that’s quite correct. To understand why companies in Germany are relatively dependent on banks, we have to go back to historic developments.

Following the Second World War, a very strong banking sector developed in relation to SME financing. The main reason for this was that companies wanted to remain independent from financial investors – in contrast to the situation in other countries. In Germany, loans could be taken out and subordinated loans obtained without having to sell company equity.

As a result, small and medium-sized enterprises in Germany are financed relatively heavily by credit institutions and banks. However, in recent years, mainly after 2009 and the financial crisis, the equity ratio has improved substantially. Businesses have become more cautious, and so the dependency on bank financing has weakened. So it’s not so much a drip as it is a healthy partnership.

» Surveys of banks’ lending businesses by the European Central Bank (ECB) have shown that banks in the Eurozone are anticipating a growing demand for credit. Is there a correlation between bank lending and investment activity?

Yes and no, as we are not currently seeing growing demand for credit across the entire Eurozone. In Germany specifically, the demand for credit is somewhat subdued at present.

Investment financing is stagnant at present – that’s the only way to describe it. Businesses are cautious when it comes to expanding capacity.
Many have learned from the period 2006 to 2008 – [this period] saw significant expansion investments, but during the financial crisis trade grew relatively slowly to fill this capacity, which means that the debt financing on these expansion investments was poorly amortised. As a result, businesses today examine very, very closely how much they can invest in expanding their capacities.



On the other hand, credit lines are increasingly taken as liquidity reserves. It is less easy now for a poor company situation to be bypassed through credit. That’s because the worse a company’s position, the harder it is for it to take out a loan. However, businesses generally prepare for bad times in good times, and secure liquidity reserves for themselves.

So in this regard, you can say that there has been a change in German SME financing: the low interest rates have not led to increased investment – as many had expected. Very careful assessments are carried out before investments are made and loans taken out.

» Instead, Germans remain “Aktienmuffel” [people who are reticent to invest in shares], and prefer to invest in insurances or building loan agreements. From your perspective, are so-called SME bonds an alternative for private investors?

No, that isn’t really an alternative – it’s the same as with shares: “so test therefore, who join forever...”

You can suffer a total loss with shares, and the same can happen with SME bonds, too. Generally speaking, SME bonds promise an attractive initial interest rate, but there is still the risk of total loss. As an investor, you bear the entrepreneurial risk either in part or in whole, and so you have to examine exceptionally carefully which shares to invest in or which SME is behind the bond to be taken out.

» “The vast majority of people are scared of the world of finance”, said Ulrike Herrmann, Economics Correspondent for the German newspaper ‘taz’. She claims that's also why the state has not yet regulated the banks. Is she right? Can you allow such statements to pass without comment?

Whether people are actually scared and whether that’s to do with regulation is anyone’s guess. To my mind, this depicts a fundamental aspect of humanity: something that’s hard to understand, that’s something of an unknown, naturally creates more uncertainty. That goes for the financial world, too.

Rather, the question is perhaps: how do we communicate certain topics? If you don’t deal with a particular topic, then it remains unfamiliar and can perhaps even cause fear. Yet when you’re well informed about something, you don’t feel insecure. But I wouldn’t trace that back to a lack of regulation.

» Global economic trends such as urbanisation often have implications – both positive and negative – beyond the financial sector, for society in general. As a bank, how do you perceive your social responsibility in the future?

As a bank, we also carefully inspect and determine which investments to finance, which trades can be made. Of course, the bank – especially in its role as a public-sector bank – has a responsibility to monitor global developments and to consider these in our examinations. LBBW, for example, excluded agricultural commodities from the commodity fund several years ago, and ceased option transactions of agricultural commodities such as grain, because there was speculation in the sector.

We only want to invest in sustainable projects, such as in the field of agriculture/forestry rather than monocultures. Several years ago, the topic of alternative power sources from naturally-occurring raw materials was very topical. However, production of these fuels very often leads to monocultures being formed. Ultimately, that’s not sustainable, and so we don’t finance such projects. As a bank, we define our social responsibility very clearly, and I think that’s very important.

» The high pace of technological change increasingly reduces companies’ life cycles. Heads of companies are demanding that you make more decisions and implement resources more quickly. Can you achieve that?

Well, there are good entrepreneurs and there are bad ones. The good ones always plan ahead of time, and think: where position will I be in tomorrow with my company? What trends have an impact on me? How should I react? What can I do?

For the bank, the important questions are: whose product portfolio is designed with the future in mind? Who is preparing for the ever-shorter product cycles, who is ready to get involved? If you can’t do that, your company won’t last long.

There are a great many companies who have already changed their product range in the past because they recognised that what they had been making until then simply wasn’t in demand any more, certain products had disappeared from the market.

If you – as a proprietor – aren’t ready to place these demands on yourself, then there’s the risk that the company will fall apart. But actually, that depends on the entrepreneurial personality. You can’t generalise it – there are good and bad entrepreneurs.

» And entrepreneurs in Saxony and Saxony-Anhalt? Are they keen to invest?

This region also has a lot of companies with great, innovative ideas. Often these companies who have great products and who have done great work subsequently become classic takeover targets for other companies from the older federal states [in the former West Germany] or from abroad.

» But that also requires a seller?


That’s true. Entrepreneurs become sellers for strategic reasons, as part of a succession plan or maybe because there’s an attractive offer. When successful companies are “sold off”, then decisions on an individual location are subsequently not taken at that location. That’s something I’ve seen quite often. I’d like to see more examples like Leesys, which an investor made future-ready by enhancing the company’s research and development on-site.

There’s great innovative potential in this region! That’s why start-up financing absolutely must be strengthened here, so that innovations can grow here, locally. At the moment, we are at a structural disadvantage to cities like Munich or Berlin.


» Is SME financing to some extent only there to make these sales a possibility? Do you get that impression?


No, no. SME financing means accompanying a business over many years – in its growth, in succession planning and in its sale. Often, succession plans are kept internal or even within the family, so that the company passes onto a second generation that is also linked to the region.


» With this buzzword “succession”, we’re seeing a further global development, namely over-ageing and its (sometimes) dramatic consequences of this for the economy. How can a bank such as LBBW sustainably counteract this trend?

As a bank, you can’t prevent general trends. The topic is so complex that there simply are no easy answers.

If, for example, a craftsman can’t find a successor, then you have to talk about the training situation. Is there too much focus on academic careers? Has the craft lost its golden touch – its creativity? How can young people be persuaded to train in manual crafts? But I would leave that to one side, that topic is simply too broad.

Of course, as a bank we are ready to provide succession financing to small and medium-sized enterprises. There are various possibilities for this, such as financing by a new associate/investor or by financing the succession via our associated company and thereby keeping the company’s presence in the region, and even strengthening it.

It the demand is there, then the bank is there to advise, but we can’t really combat global trends – and at the end of the day, that’s not the role of LBBW.


» Have you felt the effects of over-ageing in-house?

We also worry about a lack of young talent, and so we try to tackle this with training. Dual training is very sought-after.

I actually don’t really like the term “over-ageing”. I mean, when is a company too old? Yes, the average age of companies’ employees are rising – but the average age [in society] is rising overall, too.
This situation has occurred many times in the past.

The relationship between the employed and the no-longer-employed has reduced in the past. The heavily predicted, wildly negative consequences have not come to pass – the challenges have been met. That’s why I think the doom-mongering is excessive.

» Could we ask for your personal prediction: will we actually see interest rates return in 2017?

Do you mean will we see short-term interest rates come out of the negative zone and into a zero range? Interest rates will probably still not rise significantly in 2017. For one, the economic power in the Euro member countries varies considerably by region. In addition, the Euro member countries’ budgets have relatively high deficits, so there’s no political will to raise interest rates substantially.

As far as LBBW’s forecasts are concerned, we’ll likely be looking at sideways movement for interest rates in 2017.


» To conclude, a more abstract, moral question: the Süddeutsche Zeitung wrote some time ago in its Financial section that, in principle, capitalism cannot be saved. Particularly not by the banks. Does capitalism need to be saved?


I follow a physical principle: growth is finite.

Sometimes a growth limit is reached, and so it transforms into something different. In the capitalist system – and banks are only one part of this system – there is still lots of potential for growth, and opportunities to adapt. How long that will last, I can’t say. But eventually, this too will change – maybe necessarily due to our planet’s limited resources – into something different. I probably won’t be around to see it.