Corona crisis: How credit platforms can mitigate the consequences for SMEs
From the industry

Mar 26, 2020
Kreditplattformen können die Folgen für KMU abmildern


The new coronavirus Sars-Cov-2, which is currently infesting not only Germany but large parts of the world, has turned our lives upside down in a very short time. Public life has come to a standstill, curfews and contact bans have been imposed by politicians, and most shops have had to close indefinitely. But the impact on the economy could be even more serious than the health and social consequences. Many small and medium-sized enterprises (SMEs) are facing the prospect of losing through no fault of their own. Can digital credit platforms mitigate the consequences of the corona crisis for SMEs?

The corona eruption has drastic consequences for the economy

The effects of the corona crisis on the German economy are difficult to assess so far, but they are serious in any case. According to the Institute for Economic Research - Ifo Institute, depending on the scenario, between 255 and 729 billion euros will be incurred if the economy suffers from the current restrictions for two months and comes to a partial standstill, as the Tagesschau reports (website in German). The president of the Munich-based Ifo Institute, Clemens Fuest, expects that the German economy could then shrink by between 7 and 20 percent per year.

One of the biggest losers is the aviation industry. Last week, German airports reported a slump in passenger numbers by almost half. Due to strict entry and exit restrictions, airlines like Lufthansa cancelled almost all their flights and shut down a large part of their planes. Without government aid, the airline with the crane in its logo is unlikely to survive this crisis. 

Germany's automotive industry was also forced to apply the emergency brake by Corona. Volkswagen, Daimler, BMW and Audi have partially suspended production, and the assembly lines in many factories have come to a standstill. Since the automotive industry is a key sector in this country, this affects not only the large car manufacturers but also the suppliers. In total, more than 800,000 people work in this sector. Apart from the car industry and aviation, the hotel, tourism and cultural industries are probably suffering the most. Hotel bookings have collapsed, holidays have been cancelled and almost all events have been cancelled until further notice. 

However, it is not only large companies that have been hit by the crisis. Many small and medium-sized companies (SMEs) are facing economically uncertain times. The shutdown of public life affects these companies particularly hard. Although many of them have a well-running business, their products have been in demand until now and their customer base has grown, they have to fear for their future. They often lack the necessary liquidity to get through the crisis.

Medium-sized companies suffer particularly badly from the Corona crisis

"The middle class is fighting for its existence," was the headline in the Handelsblatt (website in German). SMEs and the self-employed would now have to drastically reduce their costs in order to compensate for the liquidity bottlenecks that are expected to result from the crisis. The state recognised the situation early on and is reacting with a 750 billion euro aid programme. On the website of the Federal Ministry of Economics and Energy (BMWi) (website in German), companies can find out about the conditions for emergency aid. This is the largest aid package in the history of the Federal Republic. Via the development bank  Kreditanstalt für Wiederaufbau (KfW), the billions are to be distributed to the economy in the form of guarantees and loans. 

On the other hand, experts have doubts that the banks will pass on the funds in full, due to the design of the credit programs. This is because the banks are liable for up to 20 percent of the loan amount. If the affected companies were unable to repay the loans, the risks would be reflected in the banks' balance sheets. So why should the banks pass on loans with an uncertain outcome to SMEs when they have to bear such a high risk? 

This is probably why the banks will look twice during the credit assessment before they apply for the loans from KfW. In addition, lending is linked to going to the branch, and companies have to prepare for comparatively high minimum loan amounts, which may burden their balance sheets for years to come. So what other alternative forms of financing do they have left?

"The problem is not that too little funding is provided - but that the system for transferring these funds from the state authorities to the local entrepreneur takes too long". Günter Althaus, former head of the ANWR Group purchasing cooperative

But whether the billions will really reach the medium-sized companies quickly and bureaucratically is doubtful. On the one hand, the aid loans are associated with costly bureaucracy. Affected companies have to submit an application to their main bank, which in turn receives the funds from KfW. The companies must undergo a credit assessment and prove that their business model was viable before the crisis. This takes time, which these companies do not have at the moment.

This is also the view of the Mittelstandsverbund, an association of 230,000 small and medium-sized companies. According to WirtschaftsWoche (website in German), the association fears a "mass death of small and medium-sized companies”. The biggest problem is not the amount of the loans provided, but the inefficient distribution of funds, a leading member of the SME association confirmed to WirtschaftsWoche.

Credit platforms as an alternative form of financing for small and medium-sized enterprises

Since there are doubts about the efficiency of the government aid programmes, digital lenders also want to support SMEs that have gotten into difficulties, as Finance Forward reports (website in German). Their business models have always been designed for fast, efficient and unbureaucratic lending. They are also able to provide smaller interim financing and, unlike banks, do not require collateral. They therefore represent a real alternative for all those companies that would otherwise fall through the bank financing grid. They have already proven in the past that they can provide companies with the necessary capital quickly, reliably and - above all - digitally.

In addition, the young Fintech sector has already contacted the Ministry of Finance and KfW to explore the possibility of granting emergency government loans via their platforms. So far this has not been possible, because the Ministry and the KfW would first have to adapt their lending rules. There is also the question of liability if parts of the loans are not repaid. 

But it seems that necessity is also making the state authorities inventive, and something is happening that would have been unthinkable just a few months ago: the state is sounding out possible cooperation with the credit platforms. According to a KfW spokeswoman, the development bank is currently examining a possible cooperation. She said that the ministry was in contact with all financial market players who could make a contribution. This would also include platform providers and other IT service providers.

"The current situation calls for approaches beyond the known." KfW Spokeswoman

The Federal Association of German Startups also hopes for an early solution, also to provide young companies with liquidity support quickly. The head of the association, Christian Miele, for example, expressed confidence last week on the social network LinkedIn that a solution would soon be reached.

"We are in close and direct contact with the Ministry of Economics and the KfW to find a solution so that liquidity support can also flow to the startups. We will be submitting a detailed plan to BMWI and KfW today. We get the signal that we will receive a solution within a few weeks." Christian Miele, Federal Association of German Startups

It is to be hoped that a decision will be taken quickly at the highest level. After all, time is running out for SMEs that have got into an economic imbalance through no fault of their own. This is the conclusion of a study by the investment bank J.P.Morgan Chase, which examined the cash reserves of around 600,000 SMEs (restaurants, workshops, retailers, service providers, mechanical engineers, construction companies and real estate companies). According to the study, these SMEs only have cash reserves for 27 days on average. A quarter of these companies could bridge up to 62 days from their own reserves, while again a quarter could only have reserves for 13 days or less. 

Graph on cash reserves of small and medium-sized enterprises

Financing request for companies on Innovestment

Innovestment is currently in close contact with its pan-European partners. Together, we want to explore how credit platforms can make lending to companies faster and more direct in the future - even beyond times of crisis. 

Small and medium-sized companies that currently have increased capital requirements can apply for financing at Innovestment. Although we do not offer short-term bridge financing, companies that have proven in the past that their business model is sustainable in the long term can contact us, free of charge and without obligation. We will review these requests quickly and then inform you immediately. Find out more here: