Equity Gap? – Which Equity Gap?On the Financing Structure of Germany’s Mittelstand

This paper examines the financing structure of small and medium-sized enterprises (SMEs) inGermany and questions whether an equity gap – or, more generally, a financing gap - exists.Reviewing the literature and available data sources, we find that financing constraints seem toaffect, if at all, only a very small subgroup among highly growth-oriented firms. We do notdetect any structural problems in average SME’s capital structure. Rather, German Mittelstandfirms appear to be non-growth oriented and content with their financing decisions.While the relationship-based German banking system helps to minimize the risk of credit rationing,trade credit offers an additional, stable form of liquidity “insurance”. Highly innovativefirms with strong growth potential, on the other hand, do seize the opportunity to tap unconventionalmeans of financing (e.g. mezzanine capital) and appear very successful in doing so.