Debt acquisition via private loans gaining steam with Merz Finance?
In a recent development, there's a growing enthusiasm among the private sector to invest in Germany's infrastructure. However, Thomas Weck, a prominent figure, emphasises the crucial role of the right political and legal framework conditions for these investments to bear fruit.
One of the key issues is the slow approval process in the construction sector, which could lead to delays and unused funds. This is particularly pertinent when considering municipalities' struggles to raise equity, a prerequisite for applying for grants or loans.
The trend of increased private loans among German SMEs is currently challenged due to a deteriorating economic environment, rising borrowing costs, and cautious bank lending policies. This makes the increased reliance on private loans risky and potentially unsustainable in the near term.
New lending to SMEs has already declined significantly, with a 3.8% drop in new lending year-on-year for Q2 2025, according to KfW Research. Over one third of SMEs face restrictive lending policies from banks, marking consecutive record highs. The weak economic outlook and cautious sentiment are depressing credit demand and supply willingness.
Private credit to smaller and medium-size companies often involves elevated risks compared to public markets. Metrics such as lower interest coverage ratios and increased leverage indicate heightened risk, which is exacerbated by economic uncertainty and inflation. The private credit sector displays more vulnerability in lower-quality loans, calling for detailed credit quality assessment.
Post-2008 financial regulations have moved lending towards private credit markets, partly compensating restrictive bank lending but concentrating risks in less regulated environments. Investors and SMEs face higher risk premiums, variability in access, and less transparency.
Volker Brühl, Professor and CEO of the Center for Financial Studies at Goethe University Frankfurt, sees a boost in private credit demand in the corporate sector, especially in construction and construction supply. However, he warns of rising construction costs and interest rates, which could hinder private investments, especially in residential construction.
Banks might focus more on risk avoidance and will not take on cluster risks, potentially limiting a broad boom in corporate business triggered by infrastructure programs. Ulrich Reuter, Head of Sparkassen and Giroverband DSGV, observes increased interest in private loans among small and medium-sized enterprises.
To address these challenges, Weck proposes the introduction of new joint tasks with clearly regulated financing to address the design flaw in the Basic Law where the permanent operating costs must be borne by the states and municipalities. He also suggests making Germany more attractive to investors not just through yield prospects, but through reliable structures.
Weck advocates for the involvement of private investors, banks, funds, and hybrid financing forms like mezzanine capital in the expected investment boom. However, he cautions against using mezzanine financing to circumvent municipal law and suggests adapting the legal framework if it's unsuitable.
Christian Sewing, CEO of Deutsche Bank, states that the infrastructure package will boost the bank's business. Higher indebtedness increases the risk of inflation, but Weck suggests making Germany more attractive to investors not just through yield prospects, but through reliable structures.
In conclusion, while private loans provide a critical financing alternative, the trend is not fully sustainable without improved economic conditions, better credit fundamentals, and easing monetary policy. Risks include credit defaults, increased borrowing costs, and tightening credit standards from banks, especially as SMEs face ongoing economic headwinds.
[1] KfW Research, Q2 2025 Report [2] Financial Times, 2023 [3] Bundesbank Report, 2025 [5] Ifo Institute, 2025 Business Climate Index
The finance industry is closely monitoring the trends in private investing towards Germany's infrastructure, taking into account the impact of political and legal framework conditions on the success of these investments. Due to the slow approval process in the construction sector, businesses are increasingly looking towards private credit to finance their operations, especially SMEs in the corporate sector, such as construction and construction supply. However, this rising reliance on private credit is not without its risks, as economic uncertainty, inflation, and higher borrowing costs may hinder investments, particularly in residential construction. Thus, to make Germany more appealing to investors, it's essential to address these challenges by introducing new joint tasks with regulated financing, adapting the legal framework, and focusing on reliable structures, while also addressing the need for improved economic conditions and better credit fundamentals.
