Capital Markets for SMEs: Bonds, Stock Exchange, and Alternatives

Why capital markets are on owners' minds again

For a long time, the house bank was almost the only address for debt for Germany's Mittelstand, its small and mid-sized businesses. Since interest rates rose and banks tightened their standards, more owners are asking whether there are alternatives. In the second quarter of 2026, according to KfW, 40.5 percent of SMEs in loan negotiations found their bank restrictive, the highest value since the survey began in 2017. Bonds, the stock exchange, and new platforms promise money without a bank.

This article therefore asks: Which routes to the capital market are open to small and mid-sized businesses, what do they cost, and for whom are they worthwhile? To answer it, we first clarify the terms and the thinking model of the financial growth cycle, look at the experience with SME bonds and IPOs, classify the alternatives, weigh two views, and finally derive a test for your own business. This article is not financial or investment advice.

Capital market, bond, IPO: the terms

The capital market is the market in which companies raise longer-term money from many investors instead of from a single bank. It offers two basic forms. With a bond, a company borrows money and promises interest and repayment; investors become creditors. With an initial public offering (IPO), it sells shares; investors become co-owners. In between are forms such as the Schuldschein loan, a German promissory note loan arranged by a bank and distributed among several institutional investors, or crowdinvesting, in which many private individuals contribute small amounts through a platform.

At their core, the same applies to all forms as to any external financing described in Financing growth: the owner knows more about the situation and prospects of the business than any financier. On the capital market, this information gap is particularly large, because the financiers do not know the business and do not accompany it continuously as a house bank does.

The thinking model: Berger and Udell's financial growth cycle

In 1998, Allen Berger and Gregory Udell described how a company's financing sources change over its life. Their idea: young, small companies are informationally opaque to outsiders. There are few figures, no long history, and hardly any collateral. They therefore finance themselves mainly through the owner, family, trade credit, and a bank that knows them personally. With growing size, a longer history, and verifiable financial statements, further sources open up, and only at the very end of the road stands the public capital market.

The model complements pecking order theory, according to which companies use own funds first, then loans, and outside equity last. Berger and Udell add a time dimension: not every business can use every stage; the stages available depend on how well outsiders can assess it.

An everyday analogy: anyone who moves to a new city first borrows money from friends and family. Only once they can show a job, an apartment, and a credit history do they get a bank loan. And only those who disclose their circumstances to the public can collect money from strangers. The less people know each other, the more has to be proven.

The capital market does not finance the business with the greatest need, but the one with the most verifiable figures.

What became of SME bonds

From 2010, several German stock exchanges set up dedicated segments for bonds of mid-sized companies. The idea was to give businesses without access to the large bond market money from private investors. Within a few years, a wave of defaults followed. According to an analysis by the consultancy Capmarcon, a total of 173 SME bonds with a volume of 7.3 billion euros were issued from 2010 to March 2018. 58 of them, or 37 percent, with a volume of 2.7 billion euros, were not serviced as promised.

Wilimzig (2022) examined in a dissertation why the market collapsed. Contrary to theory, it was mainly companies with weaker creditworthiness that used the market. The issuers were financially constrained but invested less than expected, and many would have been insolvent in the year of issue without the bond. Investors could hardly distinguish risky from less risky bonds, partly because ratings turned out too favorable. As a result, the market became too expensive for good companies, and they stayed away.

Herrmann (2017) also showed that private investors held a significantly higher share of SME bonds than of comparable bonds and were more heavily invested in bonds whose issuers later filed for insolvency. Institutional investors had tended to avoid these bonds from the outset. Utz, Weber, and Wimmer (2016) found an illiquidity premium for SME bonds about twice as high as for speculative-grade US corporate bonds. The market was therefore not only risky but also expensive for those who used it.

IPO: rare and demanding

IPOs have become rare in Germany. According to PwC, there were only three IPOs on the Frankfurt Stock Exchange in 2025, with a combined issue volume of 1.186 billion euros, the weakest year since 2020. Counting all new listings including the Scale segment for smaller growth companies gives seven, three of them in Scale.

For a typical mid-sized business with 20 or 200 employees, an IPO is hardly a realistic option. The costs of the prospectus, support from banks and advisers, and ongoing reporting and disclosure obligations are considerable, and they arise regardless of the amount raised. Added to this is what deters many owners more than the costs: outside shareholders bring outside control, with a general meeting, a supervisory board, and public scrutiny of every figure. Corporate governance for small businesses describes how much control a business needs without a stock exchange listing.

The alternatives between bank and stock exchange

Between the house bank and the stock exchange lie routes that more businesses can reach. Goeck and Walther (2022) surveyed 315 corporate client advisers at a large German bank, most of them responsible for companies with sales of up to 500 million euros. They observed a shift toward more market-oriented instruments, but not as a replacement for the bank. Companies wanted financial stability and flexibility above all and therefore combined bank financing with new instruments.

• Schuldschein loans are better suited to larger mid-sized companies with audited financial statements and good credit ratings. They are less public than a bond but usually require amounts too large for small businesses.
• Crowdinvesting via regulated platforms has been uniformly regulated in the EU since November 2021. Project owners may raise up to 5 million euros within twelve months this way. These are mostly subordinated loans, which are serviced after other creditors in insolvency. This is risky for investors and comparatively expensive for the business.
• Private credit funds and investment companies finance growth, acquisitions, or successions, often at higher interest or for shares, but with less collateral. For a silent partnership without voting rights, the German states' Mittelständische Beteiligungsgesellschaften, public-private investment companies for SMEs, are an option.

A finding that Boccaletti, Rossi, and Rossolini (2022) document for 220 Italian mini-bonds of small and mid-sized companies from 2013 to 2017 applies to all these routes. The yield spread fell when companies had tangible assets that reduce the information gap, and it rose when the money financed risky growth projects. A rating helped investors assess the issuer's orientation. Anyone who wants to raise money from the market must therefore make clear in advance what the money will be used for.

Two views: capital markets as liberation or as a detour?

Both readings are justified, but for different businesses. For a larger mid-sized company with audited figures, stable earnings, and a clear project, the capital market can be a sensible complement because it reduces dependence on one bank. For the great majority of small businesses, by contrast, it is an expensive detour. There, the house bank, development loans, guarantees, and silent partnerships are usually cheaper and more suitable.

I therefore consider the question of capital market readiness more useful than the question of the capital market itself. If you prepare your figures as if you had to answer to unfamiliar investors tomorrow, you also improve your position with your house bank. Bank lending describes how banks decide today and how the five-part loan file prepares the conversation. The rate turnaround for SMEs discusses how the interest rate environment affects financing and company value.

The capital market test for your business

From the financial growth cycle I derive a capital market test in five questions. It shows how far a business is from money from unfamiliar investors, and what it can do to get closer, even if it never uses the capital market.

• Are there audited financial statements, or at least statements prepared by a tax advisor, for the last three years that are understandable without explanation?
• Can the business present a three-year plan that explains what the money will be used for and how it will flow back?
• Are earnings stable over several years, or do they depend on individual customers, orders, or the owner personally?
• Is the business prepared to disclose figures regularly, including in bad years?
• Is the financing need large enough to spread the fixed costs of prospectus, advice, and reporting?

Anyone who answers yes to the first four questions but not the fifth belongs to the great majority: they are set up in a capital-market-ready way but are too small for the market. For them, it pays to play this strength with the house bank and development institutions. Anyone who hesitates on the first questions has their real task there, regardless of where the money comes from later.

Conclusion: the road to the capital market begins with your own figures

To the guiding question: the capital market offers the Mittelstand bonds, IPOs, Schuldschein loans, and platforms, but only to a few businesses at bearable cost. The experience with SME bonds shows how expensive a market becomes when investors cannot distinguish good from bad companies. IPOs are rare and demanding. For most small and mid-sized businesses, the bank remains the most important source of debt, supplemented by development loans, guarantees, and equity investments.

The financial growth cycle explains why: money from unfamiliar investors requires verifiable figures. If you prepare your figures so that strangers understand them, you have taken the most important step, whether or not you end up on the stock exchange.