1.
Supported by:
SMALL AND MID SIZED ENTERPRISES
ON THE FRONTIERS OF EXPORTING
FINANCING SME EXPORTS

2.
1 © The Economist Intelligence Unit Limited 2015
Financing SME exports
1
“Making a difference:
German SMEs and their
financing environment,”
2013. DB Research
In 2013, the Stollberg-Germany machine parts manufacturer PTF Pfuller GmbH took a first
step into the US market by opening a sales operation in Sturtevant, Wisconsin. Managing
director Oliver Zintl says the move should help the medium-sized business boost its exports to
the US. If all goes well, it plans to open a 50-person manufacturing site at the location within
the next five years.
PTF has not chosen a route typical among German SMEs to fund its export growth. Most
Mittelstand companies – usually family-owned German SMEs with strong export profiles -
choose to finance overseas expansion through internal funds. But PTF attracted funds from
SME equity investor Silver Investment Partners in 2011. Since then, the company has grown
rapidly, investing €500,000 in new machinery for its plants in Germany and in Suzhou, China,
buying two German SMEs, and opening the sales branch in Wisconsin.
Despite such stories of successful expansion based on external funding, most Mittelstand
firms remain resolutely conservative about their financing; companies like PTF are the
exception. Research by Deutsche Bank shows German SMEs are increasingly likely to use
internal funds to support export expansion and increasingly unlikely to use bank loans or
external sources.1
Relying on retained profits to fund export growth has a number of advantages. This form of
financing attracts tax relief; there is no bank interest to pay; the owner-manager does not
have to surrender equity to investors; and, in Germany at least, using internal funds suits the
aspirations of most Mittelstand companies to remain independent over the long term.
On the other hand, relying on retained earnings can also slow the pace of an SME’s export
growth, causing it to lose some market opportunities. “Some people say that German SMEs
are not very profit oriented,” says Dr Michael Lloyd, senior research fellow at the Global
Policy Institute, a research institute of London Metropolitan University, “but then, German
SMEs often reinvest up to 90% of their surplus into the business to help it grow. Culturally,
there is a mind-set among German entrepreneurs that favours slower, but stable growth.”

3.
2 © The Economist Intelligence Unit Limited 2015
For a few companies, such as PTF, “slow and steady” is not sufficient to allow them to seize
opportunities in fast-moving markets. To cover the costs of researching new markets,
developing new technologies for export markets, extending production capacity, adding
inventory and gearing up supply chains to boost exports, some German SMEs look externally
for funding. For many, this means turning to local co-operative and savings banks. Like the
Mittelstand businesses they serve, these banks have a culture of long-term investing, and
commonly provide export finance loans for up to 20-30 years. Interest rates are risk-adjusted
depending on the circumstances of the SME borrower.
This works for most SME borrowers in Germany. About 82% of SME bank loan applications in
Germany are approved, compared to only 50% for UK SMEs.2
But there are hurdles for smaller
applicants, in Germany as well as Europe-wide. According to the European Central Bank,
larger European SMEs more likely to obtain bank loans than their smaller counterparts.3
Where banks hesitate to extend a loan, they may offer mezzanine debt, in which the lender
can take shares in the company if the debt is unpaid. They might also offer equity deals, such
as PTF’s, in which the lender acquires shares outright. Where given a choice, however, German
entrepreneurs rarely take either option, preferring simple loans, to avoid diluting their
shareholdings.
Start-ups—which by definition have no track record or retained earnings to draw on—can
have the toughest time of all in obtaining bank loans. But some have found innovative
solutions. Walter Haimerl, managing director of the Leonberg, Germany-based laser cutting
and welding start-up Haimerl Lasertechnik, for example, had to find a different source
when his bank refused a €500,000 loan to buy a laser cutter he needed to boost production
capacity.
Mr. Haimerl turned to the vendor of the cutting machine, Stuttgart, Germany-headquartered
Trumpf. It had set up Trumpf Financial Services to help firms acquire its products. Nicola
Leibiger-Kammüller, Trumpf’s president, says that the firm understands the business of its
customers, and its risk is low. If a borrower defaults, Trumpf can take back the machine. Other
corporations selling high-cost equipment, such as the Munich, Germany-based engineering
conglomerate Siemens, offer similar financing deals to start-ups and to well-established
SMEs looking to expand their export capacity.
A small number of German SMEs, particularly high technology IT start-ups, seek funding from
venture capitalists, although they often find that the scale and scope of their operations is
too small to interest such investors. The average investment size in Germany--€780,000—
is often too small to attract global venture capitalists accustomed to the average €6m
investment in US-based start-ups. Nor do many venture capitalists adopt the long-term
break-even perspective of German start-ups; even German-based venture capitalists, who
2
“FSB Voice of Small
Business Index,” Quarter 3
2014, Federation of Small
Businesses, UK
3
“Survey on the access
to finance of small and
medium-sized enterprises
in the euro area,” 2014.
European Central Bank

4.
3 © The Economist Intelligence Unit Limited 2015
presumably understand their countrymen’s longer-term thinking, tend to expect a high
proportion of their SME investments to break even within 18 months.4
Beyond banks, vendor lenders, and venture capitalists, some enterprising SMEs in Germany
turn to capital markets—floating stocks and bonds—for external financing. Thomas Schaffer,
chief financial officer of the Leverkusen, Germany-based biopharmaceutical company
Biofrontera, says it chose to go to the capital markets to fund its global expansion. The firm
listed on the Frankfurt Stock Exchange in 2007 and floated on London’s small cap market AIM
in 2014.
Listing on AIM has given Biofrontera access to UK institutional investors at the cost of a few
hundred thousand euros in listing, legal and accounting fees. “You find very few institutional
investors that invest in small caps or biotech in Germany,” he explains. “They tend to go
for large caps and blue chips.” In the UK, he adds, there are experienced investors who
are potentially interested in financing the global expansion of non-UK companies. But
they insist on a London listing. The London listing has helped Biofrontera build a stronger
shareholder base to finance its future export plans, including expansion in the US, if its
products receive regulatory approval from the US Food and Drug Administration agency.
Schaffer admits it would be unrealistic for the company to adopt the slow track favoured by
many of his countrymen. “Biofrontera needs to exploit the patents on its products before
they expire,” he says, “and that requires access to a large and educated investor base”.
4
“A slow climb: business
creation in Germany,”
5 October, 2013, The
Economist

5.
While every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor Novartis can accept any responsibility or
liability for reliance by any person on this white paper or
any of the information, opinions or conclusions set out
in this white paper.

6.
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