2020 has been a challenging year, and the anticipated 2021 boom has not happened so far. According to a survey conducted by Mittelstandsverbund, a German SME Association, 29% of surveyed companies said their economic situations were "poor," which is nine percentage points more than in Q4 2020. Also, the business climate index of the Munich-based Ifo institute, a closely watched indicator of German business executives' outlooks, nosedived to 74.3 points from 85.9 in March.
With the worsening economic condition, it is getting harder for businesses to get business loans. The European Central Bank (ECB) has reported that banks are tightening their lending restrictions, stating, “that's a mirror of banks' economic uncertainty regarding the third wave of the pandemic and the speed of vaccinations.”
SMEs Brace for Tighter Liquidity
Banks tighten their lending when default risks increase, which means banks are expecting more companies to be at risk for bankruptcy. Borrowers are affected differently depending on their size. According to the German development bank KfW, getting a business loan has become harder for small and medium-sized businesses (SMEs) since March of last year. "As expected, banks are especially restricting their lending to service businesses that were hit hard by the pandemic and now also retail businesses," reported KfW.
As bank lending becomes more restrictive, SMEs must look for alternative financing solutions. Crowdfunding has become more popular, and private debt funds are seeing a massive uptick in demand. These funds are often less restrictive than banks as they are subject to different regulatory regimes.
SMEs are also increasingly looking for private investors or mezzanine financing, which is a mix of debt and equity financing. Still, bank loans remain a crucial source of financing for most SMEs. As bank lending is tightening, SMEs need to prepare for liquidity bottlenecks and brush up their balance sheets wherever possible to increase their chances of getting a loan.
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