According to the SME Panel published by the Credit Institute for Reconstruction (KfW), bank loans account for about one-third of the financing acquired by small and medium-sized enterprises (SMEs) in Germany. In 2024, German SMEs took out €81 billion in investment loans from banks and credit unions. That figure does not include working capital loans. However, there are also other financing options available to SMEs besides these traditional forms.

In this article, we explain SME financing, including when businesses need additional financial resources. We also explain the differences between traditional bank loans and alternative types of financing, pros and cons of public development loans, and revenue-based financing.

Key takeaways

• Small and medium-sized enterprises (SMEs) primarily require financing for growth, investment, digitization, and gaps in liquidity.
  
• Businesses in Germany have access to a range of alternative financing models besides traditional bank loans.
  
• Public development loans often offer favorable terms, but they are subject to certain conditions.
  
• Revenue-based financing provides flexible repayments that align with actual business performance.
  
• Finding the right SME financing involves considering a business’s financial requirements and goals, as well as the overall economic landscape.
  

What is SME financing?

SME financing refers to providing financial resources to small and medium-sized enterprises. It includes all measures businesses use to secure financing and to finance their business activities. This includes raising capital and associated financial structures and decisions.

The main difference between SME financing and financing for large businesses is that SMEs operate under different conditions. For example, because SMEs are smaller, they often have limited financial resources. In addition, individual business factors—such as ownership structures, business models, and strategic directions—tend to be of greater importance.

It is important to understand the distinction between SME financing and startup financing. Startup financing is for founding and growing young businesses. On the other hand, SME financing is used by established SMEs during different development phases.

Why do German SMEs need financing?

SMEs need financing for a variety of reasons. Below, we provide an overview of some of the most important ones:

• Invest in growth and expansion
  A common reason SMEs seek financing is to fund growth initiatives, such as increasing production capacities, opening up new markets, expanding ranges of products or services, and setting up new locations. These projects often require significant financial resources that SMEs cannot cover using their regular earnings alone.
  
• Purchase tools, machinery, and equipment
  Many SMEs require capital for fixed assets and equipment. They often need to purchase machinery, vehicles, technology, or operating infrastructure to build or expand their operations.
  
• Digitize and upgrade technology
  Another reason many SMEs take out financing is to increase digitization. Funds can be used to improve information technology (IT) infrastructure, roll out new software solutions, or automate processes.
  
• Finance regular operations
  As well as making long-term investments, SMEs often require capital to maintain their operations. Therefore, financing might be used to cover inventories, staff costs, rent, or outstanding supplier invoices. Having sufficient financial flexibility is important for many SMEs, especially those with fluctuating revenue or seasonal business models.
  
• Bridge liquidity bottlenecks
  SMEs might also need financing on a short-term basis if they experience a temporary shortage in liquid funds. The reasons for this could include late customer payments, unexpected cost increases, or economic fluctuations. In these cases, financing is used to ensure the business remains solvent and can maintain its operations.
  

What are the differences between alternative types of financing and traditional bank loans?

Traditional bank loans or business loans are still one of the most important forms of financing for German SMEs. They provide businesses with established access to capital. At the same time, SMEs today have many different financing options to choose from, each with their own pros and cons depending on the specific situation. The primary differences lie in the eligibility criteria, flexibility, and repayment conditions.

Plannable financing

One of the main advantages of bank loans is that they make financial planning easier. Businesses receive a fixed amount of capital that they pay back over an agreed-upon term with fixed or variable interest. This allows SMEs to plan larger investments long term and to reliably calculate their financing costs.

Bank loans are also an established form of financing that is familiar to many businesses and lenders. For established businesses with stable growth, obtaining a bank loan can be straightforward.

Restrictive requirements

On the other hand, certain eligibility criteria for bank loans can pose an obstacle to smaller businesses. Before awarding a loan, a bank assesses a business’s financial situation, liquidity, and ability to repay. Many banks also require collateral or personal guarantees from the owner or owners.

This can make accessing traditional bank loans harder for businesses that have fluctuating revenue or limited collateral. It can also be challenging for a business that requires a significant amount of capital relative to its size.

Flexible repayment

When it comes to financing, SMEs have many options besides bank loans. Alternative financing can offer benefits for businesses in many situations, not just as fallback options when banks deny loans.

Often, these alternatives have fewer eligibility criteria than traditional options, and they offer more flexible repayment models. While bank loans tend to come with fixed repayment plans, other forms of financing adapt more to the actual growth of the business or its available funds. Alternative approaches can prove particularly beneficial for businesses that need capital fast or have financing requirements that depend heavily on the growth of the business.

While this flexibility is appealing, it often also comes with variable cost structures or less predictability. Therefore, businesses need to consider the availability of capital in addition to the long-term impacts of each financing option.

What are the advantages and disadvantages of public development loans?

In addition to traditional bank loans, SMEs can also take advantage of public development loans, such as those offered by the KfW, regional development banks, or EU development institutions. However, similar to any other form of financing, these loans also have specific pros and cons.

Favorable terms and long maturities

One of the advantages of public development loans is that they often come with favorable conditions. Many KfW loans have low interest rates, long maturities, and initial payment holidays. This allows businesses to reduce their financial burdens and undertake larger projects with long-term planning.

Development loans can be a particularly attractive option for investments in growth, digitization, and sustainable development. Under the right circumstances, young businesses can also benefit from funding programs, such as founder loans that can help finance incorporation and initial growth phases.

Limited flexibility and high workload

Development loans are not available to all businesses all the time. They are typically earmarked for specific purposes, projects, or criteria. That means that recipients cannot always use their funding how they want. Instead, they must stick to the outlined purpose.

In addition, applying for public development loans tends to involve additional administrative effort. Businesses must describe and document their plans in detail. The KfW frequently requires a comprehensive business plan, plus additional evidence and documentation. This could include key performance indicators (KPIs), liquidity plans, information on target groups, or competitor analyses. Preparing or compiling this documentation takes a significant amount of time and can put a noticeable strain on the resources of smaller businesses.

What is revenue-based financing?

Revenue-based financing is a flexible financing alternative for SMEs. In this model, businesses receive capital, and they repay it as an agreed-upon portion of their future earnings. These repayments adapt to the actual growth of the business, rising and falling in line with its revenue.

Unlike traditional loans, this approach does not involve fixed payment obligations that businesses must meet regardless of revenue trends. As a result, businesses can better align their repayments with their actual financial circumstances and flexibly manage their liquidity.

Another upside to revenue-based financing is its low barrier to entry. Most models do not require detailed applications, reviews, and evidence. Therefore, SMEs receive capital significantly faster than they would with public development loans, for example.

Revenue-based financing is a sensible option for businesses that cannot get public loans or bank loans. This financing model focuses less on assessing a business’s available assets and more on its ability to achieve returns in the future.

Which businesses can benefit from revenue-based financing?

Revenue-based financing can be particularly beneficial for businesses with easily measurable and plannable earnings that are also subject to fluctuations. This includes businesses with seasonal revenue or fast-growing demand.

Revenue-based financing can also be a helpful option for founders and growing businesses, especially if traditional types of financing are less suitable due to the business’s lack of collateral or limited history. Therefore, revenue-based financing is a suitable addition to existing financing options for many SMEs.

How can SMEs choose the right financing model?

Choosing the right financing for a business depends on a range of factors and must always be informed by each business’s financial situation. Key factors to consider include the reason for financing, amount of capital required, desired speed, and business’s initial financial position. Therefore, SME financing requires careful analysis of the available options. For example, covering short-term liquidity gaps requires a different financing solution than a long-term investment in growth or digitization.

Businesses also need to consider the impacts of different types of financing. In addition to costs, factors such as repayment conditions, flexibility, plannability, and administrative workload also play key roles. While some forms of SME financing offer a high degree of planning certainty and fixed structures, others provide greater flexibility in adapting to business developments.

Therefore, making an informed financing decision involves considering the business’s goals and financial situation. SMEs need to assess which financing best suits their planned projects, current phases, and future developments.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.
  
• Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth, or get started today.

FAQs about SME financing