The German SME powerhouse is running out of fuel: reasons and implications of banks avoiding business in the lower SME field
Introduction
Securing debt financing is a critical aspect of business growth and expansion. However, obtaining financing in the 5-20 million EUR range has become increasingly complex. This is primarily due to the structure of financial institutions, where finance tickets below 5 million EUR are handled by local branches, while deals above 5 million EUR typically require the involvement of leverage finance teams. Given the expensive cost structure of these teams, they tend to focus on deals above 20 million EUR, leaving a significant financing gap for mid-sized transactions. As a result, businesses are turning to private debt as a viable alternative, leading to its growing importance in the financing landscape.
The Implications for the Economy
The complexities surrounding debt financing in the 5-20 million EUR space have macro-level implications for the business landscape. Fabian Kröher, Executive Director of Winterberg Group, highlights these implications, stating, “The limited access to bank debt financing for mid-sized transactions has created a bottleneck in the market. This has hindered the growth and expansion of many businesses, leading to missed opportunities for job creation, innovation, and overall economic development.”
Inadequate financing options: The focus of leverage finance teams on larger deals leaves avoid in the availability of tailored financing solutions for mid-sized transactions. As a result, businesses in the 5-20 million EUR range struggle to find suitable funding options that align with their specific needs.
Hindered business growth: Without sufficient financing options, businesses face challenges in executing their growth strategies. The inability to access debt financing can limit their ability to pursue mergers, acquisitions and organic expansion opportunities, hindering overall business growth.
Reduced competition and market dynamics: The lack of accessible debt financing for mid-sized transactions can stifle competition within industries. This, in turn, may lead to market consolidation, limiting consumer choice and potentially impeding innovation and competitive dynamics.
The Growing Importance of Private Debt
In light of the limitations in traditional bank debt financing, private debt has emerged as a crucial alternative for businesses in the 5-20 million EUR range. Private debt providers offer specialised financing solutions, addressing the unique needs of mid-sized transactions. This alternative source of funding has gained prominence due to its flexibility, speed and ability to bridge the financing gap left by traditional banks.
Fabian Kröher explains, “Private debt has become increasingly important as a financing option for mid-sized transactions. Its tailored solutions and expertise in this specific market segment enable businesses to access the capital necessary for their growth plans.”
Tailored financing solutions: Private debt providers are equipped to structure financing solutions that align with the specific requirements of mid-sized transactions. This flexibility allows businesses to secure funding while maintaining operational control and minimizing equity dilution.
Specialised expertise: Private debt providers focus on understanding the nuances and challenges of mid-sized transactions. Their industry knowledge enables them to assess risk effectively and provide customised solutions that traditional banks may not offer.
Speed and efficiency: Private debt providers often have streamlined decision-making processes, enabling faster access to capital. This agility is particularly advantageous in competitive acquisition scenarios where timing is crucial.
Expansion of the capital market: The rise of private debt has expanded the overall capital market, providing businesses with additional options beyond traditional bank financing. This diversification of funding sources enhances market stability and resilience.
Conclusion
The complexities of obtaining debt financing in the 5-20 million EUR range present challenges for businesses seeking capital to fuel their growth. Traditional banks, with their expensive cost structures, often focus on larger deals, leaving mid-sized transactions underserved. However, the growing importance of private debt has filled this financing gap, offering businesses specialised solutions and expertise tailored to their needs.
Fabian Kröher emphasizes, “Private debt plays a vital role in addressing the financing challenges faced by mid-sized businesses. Its ability to bridge the gap left by traditional banks and provide tailored financing solutions positions it as a crucial alternative in the market.”
As businesses continue to seek debt financing in the 5-20 million EUR range, the private debt industry is poised to play an increasingly prominent role. Its flexibility, specialised expertise, and ability to fill the financing gap contribute to the overall growth and stability of businesses, fostering innovation, job creation, and economic development.