KfW Research: More and more SMEs are no longer borrowing money

• The share of SMEs using investment loans has almost halved over the past 20 years
• There is no credit constraint, just falling demand
• Attitudes towards debt have changed

More and more small and medium-sized enterprises in Germany are funding their investments without bank loans. The share of investing SMEs that used bank loans has nearly halved in the past 20 years – from 40 per cent in 2004 to 23 per cent in 2023.

The decline is due more to a slump in demand rather than restrictions in credit supply. Before the 2009 financial crisis, well over one third of SMEs with planned investment projects were in loan negotiations with banks and savings banks. In the year 2006, when the European Central Bank initiated a cycle of monetary tightening, that share even stood at 47 per cent. Since 2014, however, fewer and fewer businesses have been willing to even engage in loan negotiations. In 2023, that share dropped to 25 per cent, the lowest level ever recorded.

These are the results of comparative analyses conducted by the representative KfW SME Panel. Each year since 2002, KfW Research has surveyed small and medium-sized enterprises from all economic sectors and size classes. Around 10,000 businesses took part in the most recent survey.

The declining propensity of SMEs to negotiate loans with banks was particularly surprising during the 2014-2021 period, since that was when interest rates were extraordinarily low and loans were easy to obtain. The share of businesses that were successful in their negotiations on investment loans, for example, rose from 47 per cent in 2009 to 67 per cent in 2021.

There are various possible explanations for the continuous decline in demand for loans from SMEs over the past years. These include:

• High equity ratio: Since the beginning of the millennium, German enterprises have intensified their efforts to consolidate their balance sheets. This was also driven by new capital adequacy requirements from banks, which made it more difficult to access loans. Since then, businesses have continuously increased their equity ratios. Whereas an SME's average equity ratio was still 18.4 per cent in 2002, it was 30.6 per cent in 2023. Many businesses now want to make investments using their own resources without incurring debt. Thus, 36 per cent of SMEs reported going without a loan to finance their capital expenditure in order to avoid debt in 2023.
• Ageing business owners: In 2024, 54 per cent of SME business owners were 55 years old or older. Twenty years ago, it was just 20 per cent. Earlier analyses have shown that older business owners are more reluctant to finance investments than younger ones. This may be because they do not want to assume long-term financial obligations before leaving their business or have not yet found a successor and the future of the business is uncertain.
• Tougher regulatory requirements: Tighter banking regulations mean that credit institutions need significantly more information from their debtors than before. In many cases, this makes applying for loans more costly and time-consuming for businesses. This, too, may be a reason for avoiding credit finance.

“The gradual retreat of businesses has been observable for some time now. Most recently, three fourths of SME investors have not used any bank loans whatsoever. But it is unclear how long this restraint will last”,

said Dr Michael Schwartz, SME expert at KfW Research.

“In general, financing issues are company-specific decisions, there is no general right or wrong. But when a business abandons or puts off investments because it does not want external financing as a matter of principle or loan financing specifically, that can have negative consequences for its competitiveness in the long term."

Schwartz added:

“Right now, Germany is facing a wide range of challenges. The use of external capital plays an important role particularly in the financing of large-volume transformation projects. A broad aversion towards bank loans could therefore put the brakes on the country's transformation efforts."

The study can be downloaded from www.kfw.de/fokus.

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