Weak economy: SMEs are in a credit crunch

For middle-sized businesses in Germany, securing loans has become increasingly difficult amid a weak economic climate. Banks have grown more cautious, making it harder for companies to finance investments. This challenge is particularly evident in the family-run business run by Laura Lang in Neuwied, Rhineland-Pfalz. She says her bank’s decision to demand additional guarantees caught her off guard and left her frustrated. Lang, who manages an orthopedic products company in its fifth generation, recently faced a major investment decision. The firm needed a six-figure sum to purchase new manufacturing equipment, essential for competing with foreign firms. Despite having stable earnings, long-term contracts, and a solid capital ratio, the bank required a guarantee equal to half the loan amount. With interest rates currently over four percent, Lang decided against proceeding with the loan application. The company eventually financed the new machinery using its own funds, though she admits this was a tremendous effort. “We’re tied to our location and can’t move,” she explains. While they’ve managed to secure the necessary equipment, she warns that relying solely on internal resources isn’t sustainable in the long term. This situation reflects broader challenges facing many small and medium enterprises. A recent study by the Kreditanstalt für Wiederaufbau (KfW), conducted in collaboration with the ifo Institute in Munich, reveals that more companies than ever before are reporting that banks are being overly restrictive in their lending practices. Forty percent of surveyed businesses hold this view, a record high. Dirk Schumacher, chief economist at KfW, notes that the weak economy is affecting corporate balance sheets. Both equity ratios and credit ratings have declined, prompting banks to increase risk premiums and tighten financing conditions. At the same time, fewer companies are seeking fresh capital. Only around 27 percent of large corporations engaged in credit discussions during the second quarter, according to the KfW. Hans-Jürgen Völz, chief economist at the Federation of German Industries (BVMW), shares concerns about the trend. He attributes the problem less to global economic issues and more to domestic factors. “Our members are struggling because of restrictive lending policies by banks,” he says. “But the root cause lies within Germany itself, high energy costs, increasing bureaucracy, rising wage-related expenses, and ultimately soaring labor costs.” Völz criticizes the current state of affairs, emphasizing that these issues are largely self-made. “Banks carefully assess the profitability of businesses,” he adds. “When performance declines, access to credit becomes even more limited.” This creates a vicious cycle that further strains already fragile financial positions. As the economic outlook remains uncertain, the pressure on small and mid-sized businesses continues to mount. Without adequate support from financial institutions, many will find it increasingly hard to sustain growth and remain competitive. For now, the focus remains on navigating these challenges through internal resources, though the long-term viability of such strategies remains questionable.