The High Costs and Hurdles of Obtaining Business Loans Amidst Ongoing Crisis

Due to the ongoing crisis, many companies have to stabilize their liquidity with borrowed capital. However, a current study by the KfW development bank shows that there is less demand for loans from business – the costs and access requirements are often too high.

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In recent years, the liquidity situation in many companies has been more than tense. The corona pandemic and lockdown measures have led to massive sales slumps in almost all industries. In addition, supply chain problems exacerbated the situation in many economic sectors. And as a result of the Ukraine war and skyrocketing energy costs, a large number of companies had to tighten their belts again. As a result, this was mostly at the expense of liquidity and the necessary investments for digital and sustainable transformation. But if your own reserves are no longer sufficient, the company crisis is not far off.

Credit demand is losing momentum

In recent years, the house bank in particular has secured the financing and provided sufficient liquid funds with a loan. The credit market outlook, which the economists from KfW Research published at the end of May, however, shows a downward trend. According to the survey, new lending business by banks and savings banks in Germany with companies and the self-employed increased by 19 percent in the fourth quarter of 2022. But in the previous quarter, this value was still 36.1 percent – almost twice as much. The demand for capital is thus still at a very high level, but has also clearly lost momentum.

On the one hand, the decline in demand is due to positive economic developments. The energy crisis has eased and many supply chain problems have been defused. Many companies are therefore no longer dependent on large amounts of outside capital to ensure their liquidity.

Rising costs and high credit hurdles

But increased credit hurdles and costs are also inhibiting the desire for new bank loans. The German institutes make significantly higher demands on the allocation of fresh capital, which many companies now perceive as restrictive. Added to this is the turnaround in interest rates, which is simply making Darhelen more and more expensive. According to a KfW analysis, the average borrowing costs in February 2023 were 3.86 percent. The last time there was a comparable value was in 2009. Companies are therefore considering very carefully whether they actually need a loan at the moment. Many an investment project initially ends up on hold.

And for young companies, access to credit is even more problematic. The Springer authors Richard Guserl, Helmut Pernsteiner and Thomas Brunner-Kirchmair summarize the reasons in their book “Finanzmanagement” on page 58:

It tends to be difficult for start-ups to raise external capital from professional investors (banks) because they do not have any data on the business history of start-ups to assess the risk of lending. In addition, the future development of young companies is generally associated with a higher risk (e.g. market entry, acceptance of the range of services) than with an already established company. In addition, there are hardly any guarantees.”

Consider financing alternatives

Without liquidity, however, the lights go out in a company at some point. When external financing is no longer an option due to rising costs and hurdles, many companies resort to alternative measures:

1. Companies can strengthen liquidity through improved receivables management. If customers pay their bills promptly, less interim financing is required.
2. Possible bad debt losses can be avoided by factoring.
3. Due to the general increase in costs, companies need to reassess their pricing and possibly raise prices.
4. Cost reductions also lead to relief and thus reduce the Barf on financing.
5. Outside capital is also available in the form of supplier credit or leasing.

Hardly any relaxation in prospect

Even if some positive developments are emerging: For companies, the question remains as to how access to – above all cheap – outside capital will be possible in the future. For the time being, little relaxation is to be expected on the classic credit market, as the KfW experts have ascertained. “I assume that the slowing impulses on the supply and demand side of the credit market will continue in the first half of 2023. Loan growth with corporate customers is likely to come to a standstill in the spring. However, this would still involve a comparatively high level of lending,” says dr Fritzi Köhler-Geib, Chief Economist at KfW, explains:

The forecast is subject to the risk that the events in the banking sectors in the US and Switzerland over the past few weeks could still have repercussions. The German banks are solidly capitalized. In the event that the entire banking sector were affected by higher capital requirements and more expensive refinancing as a result, credit standards and conditions could be tightened further, which would further narrow the credit channel.”