Innovations and Start-ups
Coronavirus crisis is slowing down innovation among SMEs
The coronavirus pandemic has left its mark on SMEs’ innovation activity. After a brief surge at the beginning of the pandemic, small and medium-sized enterprises further reduced their innovation activities. The key findings are:
- Three in ten SMEs reduced their innovation in 2020
- Financing difficulties and skills shortages are the main barriers
- The share of innovators in the SME sector rose in 2019 as a result of new OECD definitions
The positive development of VC business sentiment has continued into the new year. In the first quarter of 2021 the sentiment indicator of the early-stage segment rose by 11.5 points to 27.8 balance points. Only a year after the coronavirus-induced downturn in sentiment, nearly all sentiment indicators for the market environment have turned positive – many closing in on their all-time highs. Assessments of fundraising and exit opportunities improved particularly strongly in the first quarter of 2021. Appetite for new investments has climbed to a new high – no doubt also because of the quality and strength of VC deal flow, the assessments of which have also risen to near all-time high levels.
In the wake of the coronavirus slump the recovery of business sentiment in the German private equity market recently improved only very slowly but it has now gained momentum. The sentiment indicator of the later-stage segment gained 18.7 points in the first quarter of 2021, rising to -12.2 balance points, remaining just barely in red territory. Although the various sentiment indicators for the German private equity market paint a mixed picture, most of them improved at the start of the year. Surging economic optimism appears to be leading to a generally improved assessment of the situation of SMEs, so that assessments of the quality and strength of deal flow are positive again, write-down pressure is falling and private equity investors are exhibiting significantly more appetite for new investments. The drop in satisfaction with entry valuations is therefore almost inevitable.
Focus on Economics
A recent study commissioned by KfW Research has examined what technologies are most promising for Germany in the medium term. The key findings: Overall, Germany has a differentiated technological profile but it does not include the information technologies that are necessary for digitalisation. Because these technologies are of fundamental and growing importance, building competencies is a matter of urgency. In the medium term, Germany has to become internationally competitive at least in the application of such technologies.
Focus on Economics
The coronavirus crisis really pulled the handbrake on in-company continuing education in 2020 because many companies do not have the money, time and planning certainty they need. A current supplementary survey under the KfW SME Panel revealed that nearly 40% of small and medium-sized enterprises reduced their continuing education activities last year, half of them down to zero. But the need for continuing education remains during the crisis. Indeed, it grew strongly in the area of digital skills in 2020. Lack of digital skills in the workforce is one of the most formidable barriers to the digital structural transformation, making the crisis-induced decline in continuing education all the more problematic for enterprises’ future transformational capacity and competitiveness.
The current KfW SME Digitalisation Report examines the development of digitalisation activity before and during the coronavirus pandemic.
The key finding is that digitalisation activity exhibited a mixed trend during the crisis:
• One third of SMEs expanded their digitalisation activities, while another third still did not carry out any digitalisation projects at all
• Most have put crisis management measures in place that could be implemented swiftly, while strategically oriented projects were more often postponed
• Large SMEs in particular have been ramping up their activities; the SME sector could break up into two groups
Focus on Economics
A current study commissioned by KfW Research identifies which technologies are the most promising for Germany in the medium term. The most important results are:
• Germany has a differentiated technological profile
• Good starting positions particularly for automotive and manufacturing, as well as environmental and climate technologies
• It is imperative to expand competences with regard to information technologies.
Focus on Economics
Artificial intelligence (AI) is seen as a future technology with strong growth potential and the qualities to be a game changer in many sectors. It is, however, not widely used in the SME sector. The focus on SMEs carrying out R&D highlights the challenges it currently still presents.
Sentiment in the VC market improved significantly at the end of 2020, fully offsetting the coronavirus-induced drastic confidence loss of the start of the year. In the final quarter, the business climate indicator of the early-stage segment rose by 26.7 points to 17.0 balance points. Business situation and expectations assessments improved at similar rates. The three business climate indicators thus appear to be unimpressed by the renewed lockdown and even exceed the previous pre-coronavirus level. Evidently, the experience from the spring was that the startup scene is less widely affected by the coronavirus restrictions than initially feared.
Sentiment in the German private equity market continues to recover at a sluggish pace. At -30.9 balance points, the sentiment indicator of the later-stage segment hardly improved in the fourth quarter of 2020 (+6.1). Thus, it made up for only around half of the downturn from the first quarter because the path of recovery flattened halfway out of the coronavirus slump. The coronavirus crisis thus continues to weigh heavily on sentiment and impacts on assessments of both the current business situation and expectations.
Focus on Economics
The coronavirus pandemic caused a superficial push for innovation and digitalisation. However, as the crisis continued, the innovation efforts of SMEs deteriorated. As the crisis continues, this is also a threat to digitalisation. Long-term, strategic projects in particular are likely to be pushed aside or delayed as a result of the difficult financial circumstances.
Focus on Economics
In the coronavirus year of 2020, Germany’s SMEs were suddenly confronted with existential challenges and putting their plans for the future on the backburner – including transferring management to the next generation. Against that backdrop, KfW Research delivers a positive snapshot of SMEs’ succession activity. First, many entrepreneurs whose withdrawal is imminent are at least adhering to their succession plans even in the crisis. Second, they entered the crisis well-prepared and are staying the course with succession processes they had already initiated. Negotiations for almost half of the approx. 260,000 transfers planned for the next two years have been completed. But the longer the crisis drags on, the higher the risk that successions may fail. The crisis has further exacerbated a fundamental problem: the shortage of successors due to unfavourable demographics and weak entrepreneurial spirit. Removing barriers to entrepreneurial activity is key to a successful generational transition in the SME sector.
VC market sentiment continued to recover from the spring coronavirus shock. In the third quarter of 2020, the sentiment indicator of the early-stage segment climbed by 4.7 points to -9.5 balance points. VC investors rated both their current business situation and their expectations better than in the previous quarter, although situation assessments improved only very marginally. In the third quarter, the development of the market environment was mixed. In the fundraising climate as a key factor, however, the rebound from the second quarter continued, with assessments even back in the green zone. VC investors’ concerns over fundraising from the coronavirus crisis thus appear to have largely disappeared.
The recovery of business confidence in the German private equity market from the coronavirus shock has stalled. The sentiment indicator of the later-stage segment stagnated at -37.5 balance points in the third quarter of 2020. Both current business situation assessments and business expectations remained nearly unchanged. The German private equity market environment has ceased to improve since the rebound in the second quarter. On the contrary, many sentiment indicators dropped again in the third quarter. Apart from the assessment of the promotional environment and tax framework, which are in the upper green band, most of the remaining indicators are deep in the red.
Focus on Economics
Many small and medium-sized enterprises use digital platforms. This shows that many enterprises have recognised the advantages of platforms for their business and that the barriers for their use are not excessively high. Early adopters are large SMEs and knowledge-based service providers, as well as R&D-intensive manufacturers. Also apparent is the fact that young businesses and companies with a high proportion of young employees are often active on digital platforms.
The ERP digitization and innovation loan has currently been evaluated externally. As the evaluation confirms, the program addresses the key obstacles and helps to transform the innovation potential of small and medium-sized companies into growth. The funding has measurable positive effects on innovation and investment expenditure as well as on employment and sales growth, as could be determined using a modern statistical method. The funding is also characterized by high efficiency. A summary of the evaluation results can be found here:
Number of start-ups in Germany was steady at 70,000 in 2019 – impact of the coronavirus crisis is uncertain
The number of innovation- or growth-driven young enterprises in Germany has stabilised. After rising in 2017 and 2018, the number of start-ups stayed at 70,000 in 2019. It is uncertain how the coronavirus crisis will impact the development of start-ups in 2020. More businesses will close their doors and there will be fewer start-ups, probably leading to more internet-based and digital business models. One fifth of start-up founders plan to employ venture capital to finance their future growth. That is twice as many as in the previous year. The appetite for VC is growing.
VC market Germany: Ready for the next development stage
The market for venture capital has been growing in Germany for some years now. Since 2014, annual VC investment has grown from EUR 0.7 billion to EUR 1.9 billion. But the German VC market is falling further behind other countries, as their VC markets have evolved much better in relation to the strength of their economies. In order to catch up with the United Kingdom, the European champion, German start-ups would have to receive roughly twice as much venture capital each year and over one third more to reach the level of France.
Large financing rounds pose a particular challenge for the German VC market. Foreign investors are involved in nine out of ten financing rounds. For the German VC ecosystem, that increases the risk of start-ups that need finance leaving the country.
Proportion of businesses planning digital projects stagnates on a high level
KfW Group has surveyed enterprises about their digitalisation activities in collaboration with 19 business associations for the fourth time. The most important results:
- The current survey does not confirm the trend of the past years towards more businesses with digitalisation plans. But the coronavirus pandemic is set to give digitalisation a fresh boost.
- Large enterprises as well as wholesale and foreign trade businesses are pioneers of digitalisation.
- Seizing opportunities remains the most important motive for digitalisation. However, pressure from the business environment to step up digitalisation is clearly increasing.
Economics in Brief
What does the coronavirus crisis mean for Germany’s VC market? How are market participants responding and what are the consequences? In a special survey, 24 VC investors gave their views on specific aspects.
Start-ups are grappling with losses in turnover, which has also increased the risk of failure. At the same time, the crisis is impacting on their financing situation as even deals already committed to have not been closed. The main reason for this appears to be the great uncertainty caused by the coronavirus shock. However, the threat to further deals not materialising because of the coronavirus should have passed by now. Nevertheless, how long investors will now remain focused on their core business will presumably depend on how well businesses and economies get through the crisis.
The German VC market was unsettled by the uncertain consequences of the coronavirus crisis at the end of the first quarter of 2020 but the initial shock has passed for now. Business sentiment clearly recovered from the all-time low. In the second quarter the sentiment indicator of the early-stage sentiment rose by 50.0 to -11.1 balance points, reversing more than half of the coronavirus slump. VC investors’ assessments of both the current business situation and expectations recovered. The various sub-indicators also improved. VC investors are breathing a sigh of relief with respect to fundraising, exit opportunities, new investment and value adjustments, for example.
Confidence has returned to the German private equity market after the massive coronavirus slump. In the second quarter of 2020 the sentiment indicator of the later-stage segment reversed more than half of the first-quarter losses, rising by 45.6 to -40.6 balance points. Later-stage investors are again taking a more positive view of the current business situation and have higher expectations as well. Although sentiment has risen from its low, most indicators remain negative despite the rebound. Private equity investors are still disgruntled by the fundraising climate, exit opportunities and write-down pressure.
Focus on Economics
Many SMEs are reacting to the coronavirus crisis with innovations. 27% have already introduced process, product or business model innovations. If we include the companies who are still planning to do this, the share rises to 43%. This includes businesses who have suffered heavy losses in turnover in particular. The innovations tend to represent measures that can be adopted on an ad hoc basis rather than result from more long-term development processes.
Bolstered by cyclical and labour market growth, entrepreneurial activity in Germany picked up again in 2019 for the first time in years. The number of newly founded businesses rose to 605,000 (+58,000). This was primarily due to a significant rise in part-time business start-ups, while full-time start-ups dropped to a new low. At the same time, the number of opportunity start-ups grew by a disproportionately high 439,000. The number of internet-based and digital start-ups also rose. The outlook for entrepreneurial activity in 2020 was positive but the coronavirus pandemic is changing much of this. Many entrepreneurial plans, which had increased again, will now likely be put off. However, the crisis can be expected to result in more necessity start-ups.
Focus on Economics
Many small and medium-sized enterprises are responding creatively to the coronavirus crisis, with 43% adapting their product/service offerings, sales method or business model. When combined with businesses that still plan to do this, that percentage even rises to 57%. Companies that were hit particularly hard by the crisis and those that have previously innovated are leading the charge.
The uncertain consequences of the coronavirus pandemic have unsettled the German VC market. Business confidence has plummeted to an all-time low. In the first quarter of 2020, the business climate indicator of the early-stage segment nosedived by 72.3 points to -61.3 balance points – an unprecedented decline. VC investors’ assessments of both the current business situation and expectations have deteriorated dramatically.
The coronavirus pandemic has hit the private equity market hard. The German private equity market has experienced a massive loss of confidence. In the first quarter of 2020, the sentiment indicator of the later-stage segment plunged by 94.3 points to -86.7 balance points. Never before have later-stage investors been more pessimistic about both their current business situation and their expectations. The indicator for the current business situation dropped to -82.2 balance points, while the indicator for business expectations fell to -91.2 of -100 possible balance points. The fund-raising climate has now fallen from a record-high level in the previous quarter to just above its previous lowest level.
Digitalisation projects are gaining traction in the SME sector but digitalisation expenditure has remained low for years
The most important findings are:
- 40% of SMEs completed at least one digitalisation project.
- Digitalisation expenditure was EUR 19 billion per year.
- SMEs spent an average EUR 17,000 on digitalising their business.
- The coronavirus pandemic will trigger a surge in digitalisation.
The German VC business climate has weakened again but remains good. The business climate indicator of the later stage segment fell by 8.0 points to 10.1 balance points in the fourth quarter of 2019. VC investors rated their current business situation significantly poorer than in the previous quarter, while business expectations remained relatively stable. The indicator for the current business situation decreased to 13.2 balance points (-14.3), while the indicator for business expectations stabilised at 7.0 balance points (-1.7).
The business climate in the German private equity market hardly changed on the preceding quarter. In the fourth quarter of 2019, the business climate index for the later stage segment remained unchanged at 6.3 balance points. Later stage investors gave their current business situation and expectations nearly the same rating as before. The indicator for the current business situation was 11.1 balance points (-1.9), while the indicator for business expectations was 1.5 balance points (+1.9). On average for the year 2019, the business climate in the private equity market was on the upper edge of the normal range and thus remained well behind the two very good previous years.
Focus on Economics
Do digitalisation projects have specific characteristics that conflict with external financing? To answer this question, this study compares the financing structure of digitalisation projects with that of investments using a statistical procedure from evaluation research.
The central finding is that the financing structure of both types of projects differs significantly – even when comparing companies that are similar in size, age, credit rating and the respective project scope. This indicates that special characteristics of digitalisation projects are an obstacle to financing with bank loans.
The innovator rate in SMEs is falling to the lowest level ever measured by the KfW SME Panel. Since 2006 the share of innovators among SMEs of all sizes and sectors has declined. The loss of innovators affects both enterprises that produce market innovations as well as the broad mass of imitating innovators. Innovation expenditure is developing without a clear trend in the medium term. Innovation efforts are thus concentrated in fewer and fewer enterprises.
In order to ensure Germany's competitiveness, an innovation policy is needed that pursues two strands: On the one hand, the research and development (R&D) of new technologies must be encouraged. On the other hand, it is necessary to support the innovation activities of companies without R&D, which cannot be achieved through R&D funding measures.
The number of innovation- or growth-driven young enterprises in Germany has increased again. In 2018 there were 70,000 start-ups, after 60,000 in the previous year.
On average, nine in 100 businesses founded by men have start-up characteristics, as opposed to only three in 100 for women. Businesses founded by women and men differ primarily in how strongly they are innovation- and growth-driven. Examples of suitable measures for closing the gender gap include stepping up efforts to attract women to technical and scientific careers and teaching business skills to school students.
Focus on Economics
There has been a slight drop in the number of upcoming SME successions in Germany. Around 152,000 owners of SMEs want to transfer their business to a successor by the end of 2021. This is illustrated by recent data of the KfW SME Panel. One reason for the recent drop is that business starters have been showing greater interest in taking over existing SMEs. Besides, more enterprises already have a succession plan. Succession within the family continues to lose importance. On the other hand, there is an increasing demand for external buyers. Owners’ price expectations have also increased again. Looking ahead, demographic change will increase the need for successors. A growing number of SME owners who are ready for a transfer will be facing a shrinking number of potential successors. There are not enough emerging entrepreneurs to take over existing businesses.
The business climate in the German venture capital market has deteriorated. The early-stage segment indicator fell by 6.1 points to 16.8 balance points in the third quarter of 2019. VC investors rated their current business situation more positively again but pessimism around their expectations returned. The indicator for the current business situation rose to 26.5 balance points (+2.7), while the indicator for business expectations fell sharply to 7.1 balance points (-14.8).
Sentiment in the later-stage of the German private equity market continues to deteriorate. The business climate indicator of the later-stage segment fell by 3.3 points to 6.4 balance points in the third quarter of 2019. Private equity investors rate their current business situation almost as positively as before but have more pessimistic business expectations, so positive and negative assessments are now balanced. The indicator for the current business situation remains hardly unchanged, at 13.1 balance points (-0.7), while the indicator for business expectations fell to -0.3 balance points (-6.4).
Economics in Brief
The number of creative business start-ups has dropped considerably in the wake of declining start-up activity in Germany: it fell from 178,000 in 2003 to 98,000 in 2018. However, start-up activity in the creative sector has trended positively and, after several ups and downs, was last at 18%. The decline in creative start-ups is particularly prominent among male business starters. This number has more than halved. As a result, the sub-market “software/games” has been particularly hit where, based on a long-term average, 80% of business starters are male.
The business climate in the VC market is recovering after two major setbacks. The business climate indicator of the early-stage segment rose by a strong 13.2 points to 23.2 balance points in the second quarter of 2019. VC investors are more positive about their current business situation but, in particular, they hold much more optimistic business expectations again. The sentiment indicators for the VC market environment, however, are increasingly deteriorating.
Sentiment in the later stage of the German private equity market has fallen for the fourth consecutive quarter. The business climate indicator of the later-stage segment dipped slightly by another 2.7 points to 10.1 balance points in the second quarter of 2019. Equity investors are more downbeat about their current business situation than before but again hold more optimistic business expectations. The indicator for the current business situation fell to 14.1 balance points (-9.5), while the indicator for business expectations climbed to 6.1 balance points (+4.1).But despite the cooling business climate, most assessments of the later-stage market environment remain in the green.
For the 3rd time, KfW Group, together with 17 trade associations, has surveyed the businesses on their digitalisation activity. The most relevant results are:
- Two thirds of businesses (66%) have plans to implement digitalisation projects in the next two years. These plans can be observed in all business sectors
- Problems come in to focus with increased commitment to digitalisation
- Data security / data protection and lack of IT competences, including a shortage of qualified IT workers, as well as difficulty adapting the organisational structure and work organisation are the biggest hurdles
Focus on Economics
Three types of innovators can be identified among the group of small and medium-sized enterprises (SMEs). This study examines whether there are any differences in business performance between the three groups.
The key finding of the analysis is that R&D-based innovators more often achieve higher growth rates. However, if we disregard enterprises with extremely high growth rates, there is hardly a difference in business growth between the groups. Small and medium-sized enterprises can be successful innovators even without own R&D.
Focus on Economics
The ways in which SMEs generate innovations are only rarely the subject of public debate. The new survey by KfW Research and the ifh Göttingen demonstrates that small and medium-sized SMEs can be divided into three types of innovators.
One innovator type mainly uses industry-specific practical knowledge. A second innovator type primarily relies on the sales market as a source for information, a wide range of in-company interactions and a well-developed error management culture. The third innovator type conducts its own R&D and uses scientific findings. Other sources include information from the business environment, a well-developed error management culture and the use of management practices aimed at stimulating innovation activity.
Innovator rate has fallen again
The share of innovative small and medium enterprises (SMEs) is returning to its long-term downward trend after a brief interim high. Since the middle of the 2000s, especially small SMEs with less than 5 employees have ceased their innovation activities. The central findings are:
- The innovator rate drops by 4 percentage points to 23%
- Innovation spending in SMEs continues to fall to EUR 30.7 billion
- Process innovations are developing positively against the trend - digitization is likely to be a focus here
- Research-based SMEs are launching market novelties seven times more frequently than companies without own research and development (R&D)
Please note: Up to the year 2018, our publication was called the KfW Start-up Monitor
Bolstered by a healthy domestic economy, start-up activity in Germany stabilised in 2018 after declining for many years. The number of business starters was 547,000, down slightly on the previous year. The number of business start-ups by women grew, while male start-ups continued trending downward. Start-up activity has been dominated by new business creation. The year 2018 saw more of it than ever before: Eight in ten business starters ventured into self-employment by setting up new businesses. But there has also been a positive trend regarding business starts through the takeover of existing firms for some time now. Business starters have invested noticeably more capital in their business on average in the past decade. Full-time business starters in particular are investing larger amounts. Overall, start-up finance remains a hurdle at which even many start-up plans fall.
Sentiment in the German private equity market continued to fall after the turn the year. In the first quarter of 2019, the business climate index of the German Private Equity Barometer dropped by 3.1 points to 64.7 balance points. At the same time, the VC business climate continued to be very good despite the decline, while the later-stage climate stabilised on what is still a “good” level. The market environment exhibited varying developments. The fundraising climate improved to just under its all-time high, while assessments of the level of deal flow rose to a new record. Furthermore, the pricing climate eased noticeably. On the other hand, exit opportunities deteriorated sharply and pressure on write-downs increased.
The Czech Republic has been regarded as one of Central Eastern Europe’s most attractive locations for many years. The country has a long industrial tradition and rests on a sound economic footing. It has also created noteworthy research infrastructure in the past decade. On that basis, Germany’s neighbour is now undertaking broad efforts to modernise its economy even faster with the aim of joining the ranks of Europe’s top innovators by 2030.
Digitalisation has reached SMEs. The share of SMEs that has successfully implemented digitalisation projects has risen to 30%, up 4 percentage points on the last period. Companies of all sizes have shown growth – and this in almost industries. Total expenditure on digitalisation has risen to EUR 15 billion but expenditure per company has stagnated at a low level. Furthermore, small companies invest less and less often in digitalisation. This gives rise to concerns of a potential divide emerging between large, heavily digitalised SMEs and small SMEs left behind in the digital transformation.
Sentiment in the German private equity market continued to decline at the end of the year. In the fourth quarter of 2018, the business climate index of the German Private Equity Barometer fell by 4.2 points to 67.9 balance points. But although confidence was lower in the second half-year, 2018 was on average the year with the best business climate since 2003 when the German Private Equity Barometer was launched. But sentiment was divided at the end of the year. While the business climate set a new record in the venture capital segment, it cooled yet again in the later-stage segment.
Focus on Economics
Fear of failure hampers start-up activity in Germany more than elsewhere. But the good news is that this fear is slowly fading. Fear of failure is mostly driven by fear of financial burdens, should things go wrong. Contrary to widespread assumption, fear of stigmatisation hardly plays a role. Financial risk is part and parcel of entrepreneurial freedom and must not be ignored. Improved teaching of entrepreneurial skills and basic economics, however, can provide potential business founders with the tools to more accurately gauge this risk and take away some of the fear – a knowledge basis that should be created early.
Focus on Economics
According to recent data collected by the KfW SME Panel, around 227,000 owner-managers of small and medium-sized enterprises want to place their business into the hands of a successor by the end of 2020. More than one third of these enterprises have already found a successor. A further quarter are conducting negotiations. The current generation of owner-managers is generally more aware of the need to face the challenges of generational change in a timely manner. Succession outside the family is generally on the rise. Most succession planners have a sound earnings situation, profitability and equity base. Nevertheless, not all will succeed in handing over their business. Time is running out for 36,000 SMEs in particular. They want to complete their succession in the next two years but have not even taken the first step yet. And the main bottleneck remains: The pool of emerging entrepreneurs is too small.
Focus on Economics
Migrants are more active entrepreneurs than the average citizen. For one thing, they have a stronger desire for occupational independence and for another they have lower formal qualifications on average and, hence, more limited labour market opportunities. Migrant start-ups are also different, as they have more co-workers and focus on the personal services sector. They are more strongly affected by certain start-up problems, such as financing. All these patterns are even slightly more pronounced among migrants who live in a non-German-speaking household. Language barriers play a role here and it takes time and support to break them down.
Focus on Economics
In 2017 there were around 154,000 ‘young’ social entrepreneurs with 108,000 social enterprises in Germany. That was a share of 9% of all young entrepreneurs. Besides seeking to make a profit, at the very top of their target system is a particular social or ecological concern for which they forgo possible returns. In addition, they also like to break new ground. Just under one third of ‘young’ social entrepreneurs offer new-to-market innovations that were previously unavailable in their target market and one in four develop technological innovations of their own to market readiness. That makes many social entrepreneurs pioneers of sustainable economic development. The share of social entrepreneurs is above average among older business founders. They show that it is possible to realise new plans even at an advanced age and that should be welcomed in the face of demographic change. Social entrepreneurs are more likely to be unsure about having the required business skills, so they should be supported in acquiring such skills.
Focus on Economics
Many businesses deplore that high costs, high risks and financing difficulties are making it hard for them to innovate. This study therefore examines whether differences exist in the financing of capital expenditure and innovation and whether these differences may be a sign of limited innovation finance opportunities. In fact, innovation finance is clearly distinct from investment finance. The findings confirm theoretical considerations that specific characteristics of innovation (such as uncertainty about success, difficulties in assessing projects and lack of collateral) are a barrier to external financing with bank loans in particular.