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Investing for Growth: A Comparison of German and British SME funding

KAS, the GPI and the Industry Forum held a panel discussion on the topic of SME funding at Mary Sumner House, on the evening of Jan 16th, 2014. With over 85 people in attendance, the topic addressed, a comparative analysis of UK and German SME funding, generated considerable interest.

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Discussion in the first panel focussed on the “German Mittelstand”. Ger-man SMEs are considered the backbone of the economy and their per-formance helped Germany to weather the global crisis from 2008 on-wards. There are around 3.6 million small and medium-sized enterprises in Germany, with a combined annual turnover of roughly £1,65tr (exclud-ing turnover of foreign subsidiaries). SMEs account for approximately 68% of the total workforce (28,1 million people). In Germany, SMEs pro-vide training to 86% of all trainees, which makes a major contribution towards the comparatively low level of youth unemployment in Germany. Since the beginning of the financial crisis, SME credit demand has stead-ily decreased and self-financing has become more important.

The second panel drew a comparison between German SMEs and their UK counterparts. Due to cultural and historical variance, British SMEs are twice as profitable. However, profitability can be considered in different ways as German enterprises keep up to 90% of their profits for future in-vestments, whereas British companies’ strategies seem to differ in their approach. There are 4.9 million SMEs in the UK, with an annual turnover of up to £1,57tr. Combined they employ approximately 11 million people. Roughly, 40% of SMEs are dependent on external finance and 50% struggle to access this finance. The demand for external financing and funding remains consistently high but attempts to ease access are gradu-ally increasing.

Following the presentations, debate took in a number of topics. It was stressed that both UK and German SMEs have been facing difficulties since 2008. Despite differences, there are also commonalities between the two models. UK SMEs are very similar to their German counterparts in terms of being conservative, long-term thinking and mostly family owned.

The role of small businesses as a driver of future growth was stressed throughout. Both panels agreed that the future of SME banking relies on trust in the banking system. Since there are 1942 institutes providing credit financing to SMEs in Germany, but only 367 institutes in the UK, there clear differences with regards to competition in banking provision, and regionalised funding offers and products. Moreover, professional ex-pertise, combined with local knowledge, is very important for banks to fully understand SMEs’ ambitions. Lastly, the promotion of alternative sources of finance may afford greater options for SMEs.

Further information regarding SME funding can be found here:

German Mittelstand:Engine of the German economy

Profile: The German SME sector - KfW

A recovery on the horizon?

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