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Governments Supporting Small Businesses: The German Model

Oron IsraeliSep 24, 2012

Many criticized governments’ involvement in the economy, especially after millions were given to failing businesses during the last economic crisis. However, I have recently learned that governments all over the world are supporting small businesses year-round. It seems that governments finally understand that small businesses are the main growth engine of their economies, and in recent years governments have implemented financing programs to support the small businesses.

I started researching the subject after a new and rising “star” in the Israeli political sky mentioned that he plans to reform the way the government in Israel currently helps finance small businesses. His new plan will focus on two main changes: First, he plans on offering eligible small business state guarantee for up to 50% of their credit line. Second, he plans on simplifying licensing processes and providing small businesses with legal and financial consultancy from experts hired by the Israel Small and Medium Businesses Agency.

I was intrigued to see how innovative his plan was and started researching online. While Israeli business owners have something to look forward to until he is elected, small-business owners in the UK, US, Australia, and Europe are already enjoying government support.

While researching I came across an interesting figure: according to an Irish Central Bank report, the European average rejection rate for small business loans is 25%, and in some countries (like Ireland and Greece) it even reaches 50%. I also learned about one European country that is able to keep those rates low with a special banking model.

The German government operates a state-owned investment ban, called the KFW. It was founded in 1948 to promote the industrial rebuilding of a country wrecked by the Second World War. Today it is the sixth biggest bank in Germany, and it is one of the largest capital issuers in Europe.

How does it work? Corporate customers contact their own private bank for financing. The private bank then forwards the lender’s application to KFW, which then assesses the project to check if it complies with the KFW’s key strategic targets: promoting SMEs, entrepreneurialism, clean-technology, nationally important infrastructure projects, and international project finance. The private bank can then re-finance the loan at favorable rates because of its government guarantee and its access not only to the capital markets but also to federal budgets. This system has proved so successful that a recent statement by the UK’s business secretary suggests that the Bank of London is considering copying the German model.

While the banking system in Europe is still on the ropes, someone needs to hold out a helping hand to small businesses. In an era where banks are reluctant to finance small businesses (especially ones that are in the startup phase), governments that step up to the plate gain growth and stability even in hard times.