What are the reasons behind the current tightening of lending conditions?

“Essentially, it is the overall economic situation: structural problems caused by a lack of investment and innovation, rising factor costs and declining competitiveness, as well as a persistently weak economy. In addition to US trade policy, the commodities market, trade policy and geopolitical conflicts are causing uncertainty. As a result of these multiple factors, financial institutions anticipate a deterioration in corporate earnings, particularly among SMEs, and an increased risk of default due to insolvencies. In light of the negative experiences of recent years, financial institutions have also tightened their lending criteria significantly. For example, they are demanding more collateral, higher capital ratios and stricter covenants, and are scrutinising these points more closely.”

What should companies bear in mind when entering into negotiations with lenders?

“The most important thing is to negotiate loans at an early stage, before the company comes under severe financial pressure or a crisis is already looming. At a later stage, the company will be in a weaker position when negotiating. Even then, it is still possible to secure a loan, but the company’s situation is usually reflected in the terms and conditions, and it takes skill to bring the negotiations to a successful conclusion.”

Apart from the timing – what points do companies score with during loan negotiations?

“You’ll make a good impression by proactively exploring potential collateral. You should also have sufficient operating cash flow to service loans from your day-to-day business. In any case, transparency in the form of KPIs and reporting is essential, including an analysis of various development scenarios.”

Will lending conditions recover in the foreseeable future?

“In the short term, I do not expect lending conditions to ease, particularly as banks anticipate a further rise in loan defaults. Furthermore, regulatory requirements for lending are becoming more stringent. Consequently, a recovery can only be expected if trade policy uncertainties subside and the economic situation improves significantly.”

Whilst businesses are facing tighter lending conditions, there is simultaneously little interest in financing on the part of companies. How should this be interpreted?

“Although the period of high interest rates in 2023/24 is now behind us, interest rates on corporate loans remain at elevated levels. Currently, no further easing is expected. Some forecasts predict a resurgence in inflation, fuelled by conflicts in the Middle East. Furthermore, companies are wary of the tightened lending criteria and are less inclined from the outset to consider negotiating new loans.”

Doesn't that solve the problem? If there is less interest, most companies could just not care about the hurdles involved in lending.

“Quite the opposite. A vicious circle is emerging between low interest in financing, a weak economy and tighter lending conditions. On average, German companies are reluctant to invest. There are, of course, good reasons for this: weak demand and uncertain sales prospects, low capacity utilisation and general uncertainty. Investments often have a time horizon of up to ten years, and at present this timeframe is unpredictable. But waiting indefinitely is not the answer either. We need innovation to drive economic growth. And that means we need entrepreneurs who are prepared to make the necessary investments.”

Thank you to Tobias Hassel for his assessment!