Financing in the Corona crisis

After a shut­down las­ting several weeks, count­less com­pa­nies throug­hout Ger­many are expe­ri­en­cing serious finan­cial dif­fi­cul­ties and are strugg­ling to sur­vive. The pan­de­mic affects almost all sec­tors of the Ger­man eco­nomy and pres­ents com­pa­nies of all sizes with immense chal­len­ges. The Federal Govern­ment wants to alle­viate the hardship of com­pa­nies with com­pre­hen­sive finan­cial aid.

Defini­tion cri­te­ria of SMEs and large-scale enter­pri­ses

With regard to finan­cial sup­port a dis­tinc­tion has to be made bet­ween SMEs and large-scale enter­pri­ses. The clas­si­fi­ca­tion into which size cate­gory a com­pany falls is to be made in accor­dance with the defini­tion cri­te­ria of the EU Com­mis­sion.

Small enter­pri­ses are enter­pri­ses with less than 50 emp­loyees and an annual tur­no­ver or balance sheet total of maxi­mum EUR 10 mil­lion, based on the last annual finan­cial sta­te­ment. By defini­tion, medium-sized com­pa­nies have less than 250 emp­loyees and an annual tur­no­ver not excee­ding EUR 50 mil­lion or a balance sheet total not excee­ding EUR 43 mil­lion. If these cri­te­ria are excee­ded, the com­pany is to be clas­si­fied as a large-scale enter­prise. For example, an enter­prise is only to be trea­ted as an SME if it exceeds or falls below thres­holds in two conse­cu­tive finan­cial years.

If at least 25 % of the enter­prise’s capi­tal is con­trol­led by pub­lic aut­ho­ri­ties or bodies gover­ned by pub­lic law, it is exclu­ded from the defini­tion of an SME.

The Corona finan­cial sup­port at a glance

On 27 March 2020, the Bun­des­rat (Federal Coun­cil of Ger­many) pas­sed a sup­port pac­kage that was intro­du­ced into the legis­la­tive pro­ce­dure under an urgent pro­ce­dure, which inclu­des emer­gency sup­port for small com­pa­nies and a reis­sue of the pro­tec­tion fund for large com­pa­nies, the so-cal­led eco­no­mic sta­bi­liza­tion fund. In addi­tion, a KfW Emer­gency Pro­gram exists with a risk assump­tion by the Federal Govern­ment of up to 90 %, which will be exten­ded on 6 April 2020 to include a pro­gram for KfW instant loans for SMEs with a risk assump­tion of up to 100 %. The aim is to give com­pa­nies affec­ted by the Corona cri­sis quick and easy access to loans from their prin­ci­pal banks. If com­pa­nies lack the necessary col­la­te­ral to take out a bridge loan, gua­ran­tee banks can assume up to 80 % of the risk. In addi­tion, other sup­port pro­grams are in place in the indi­vi­dual federal sta­tes.

Bet­ter finan­cing oppor­tuni­ties: KfW Coro­naaid

In order to improve their liqui­dity and cover cur­rent ope­ra­ting costs, com­pa­nies that were not in dif­fi­culty on 31 Decem­ber 2019 can apply for a KfW loan through their prin­ci­pal bank. This option is available to small and medium-sized enter­pri­ses as well as large-scale enter­pri­ses.

The loans can only be drawn if tem­porary finan­cial dif­fi­cul­ties due to the corona cri­sis exist. Thus, KfW loans can­not be used for debt refun­ding or pro­lon­ga­tion of exis­ting finan­cing.

KfW Ent­re­p­re­neur Loan for Estab­lis­hed Com­pa­nies

Estab­lis­hed com­pa­nies that have been active on the mar­ket for more than five years can apply for the KfW Ent­re­p­re­neur Loan. The KfW Ent­re­p­re­neur Loan can be used for invest­ments, wor­king capi­tal (e.g. liquid funds, per­son­nel costs, rents), acqui­si­ti­ons and lea­sing costs, whe­reby in the case of lea­sing the total costs minus the resi­dual costs are eli­gi­ble. KfW assu­mes a large part of the lia­bi­lity risk in these loans: for small and medium-sized enter­pri­ses the cre­dit risk assump­tion is up to 90 %, for large enter­pri­ses up to 80 %. This is inten­ded to inc­rease the wil­ling­ness of the house banks to grant loans.

Com­pany groups can bor­row up to EUR 1 bil­lion from the KfW, sub­ject to cer­tain loan limits. As a result of the Corona cri­sis, the cri­te­ria for eli­gi­bi­lity to apply for loans have been exten­ded so that com­pa­nies now can apply for loans up to KfW cre­dit rating class 6 (which roughly cor­res­ponds to Moody's B1) wit­hout addi­tio­nal col­la­te­ral. Acce­le­ra­ted app­li­ca­tion pro­ce­du­res are in place depen­ding on the loan volu­mes: For loans of less than EUR 3 mil­lion there is no risk assess­ment. For loans bet­ween EUR 3 and 10 mil­lion there is a fast-track pro­ce­dure in which rela­ti­vely few docu­ments have to be sub­mit­ted.

ERP start-up loan for young com­pa­nies

Young com­pa­nies that have been on the mar­ket for less than five years need to be loo­ked at more clo­sely: If the com­pany has been in busi­ness for at least three years or can pre­sent two annual finan­cial sta­te­ments, the Federal Govern­ment assu­mes up to 90 % of the risk in the case of SMEs and up to 80 % in the case of large-scale com­pa­nies with the "ERP-Start-Up Loan Uni­ver­sal”, equal to the rules for the KfW Ent­re­p­re­neur Loan. The other cri­te­ria, such as the res­tric­ti­ons on the maxi­mum loan amo­unt per com­pany group, the exten­sion of eli­gi­bi­lity to KfW cre­dit rating cate­gory 6 and the cut­ting back of docu­men­ta­tion requi­re­ments in the app­li­ca­tion and review pro­cess, are identi­cal to the requi­re­ments for the KfW Ent­re­p­re­neur Loan as well.

Newly foun­ded com­pa­nies that have been on the mar­ket for less than three years can also take advan­tage of the "ERP-Start-Up Loan Uni­ver­sal” In this case, howe­ver, the KfW does not release the com­pany from its lia­bi­lity, so the house bank bears the ent­ire cre­dit risk. Alter­na­ti­vely, start-ups and com­pany suc­ces­sors can take advan­tage of the “ERP Start-Up Loan - Start-up Money”, which allows a maxi­mum loan volume of EUR 100,000 down to EUR 30,000 to be used as wor­king capi­tal. KfW faci­li­ta­tes access to the ERP Start-up Loan Start-up Money" by assu­ming 80 % of the risk.

KfW (Instant Loan) for Medium-sized com­pa­nies

As of 6 April 2020, small and medium-sized enter­pri­ses with more than ten emp­loyees addi­tio­nally have the pos­si­bi­lity to apply for KfW instant loans for purcha­ses and run­ning costs. What makes this spe­cial is that the KfW covers these loans with a 100 % gua­ran­tee from the Federal Govern­ment. With the KfW instant loans the Federal Govern­ment has res­pon­ded to demands by various busi­ness asso­cia­ti­ons. In recent weeks, many com­pa­nies have repor­ted pro­b­lems in obtai­ning loan com­mit­ments from their house banks for KfW Ent­re­p­re­neur Loans or ERP Start-up Loans - Uni­ver­sal. Due to nega­tive future pro­s­pects and the asso­cia­ted lack of cre­dit­wort­hi­ness of the app­li­cants, some of the house banks had not been wil­ling to assume the remai­ning 10 % risk and had refu­sed to make loan com­mit­ments for the KfW Corona aid already in place. The full assump­tion of risk by the Federal Govern­ment is inten­ded to remedy this pro­b­lem.

With the newly laun­ched KfW instant loans, com­pa­nies with 11 to 50 emp­loyees can apply for a loan of up to EUR 500,000.

Com­pa­nies with more than 50 and up to 249 emp­loyees can take out an instant loan of up to EUR 800,000. The loan amo­unt is cap­ped at up to three months' sales for 2019 and will only be gran­ted to com­pa­nies that have been in the mar­ket at least since January 2019 and have most recently gene­ra­ted pro­fits (eit­her in 2019 or on average over the past three years). The cur­rent inte­rest rate for the instant loan is set to 3 % with a term of ten years. Since KfW assu­mes all risks, there is no need for a risk assess­ment by the prin­ci­pal bank.

KfW Spe­cial Pro­gram

A KfW spe­cial pro­gram has been set up for medium-sized and large-scale enter­pri­ses, which enab­les KfW to parti­ci­pate directly in syn­di­ca­ted finan­cing for invest­ments and wor­king capi­tal. KfW assu­mes up to 80 % of the cre­dit risk (maxi­mum 50 % of total debt). KfW's share of the risk under the syn­di­ca­ted finan­cing must amo­unt to at least EUR 25 mil­lion - with 80 % risk assump­tion the mini­mum loan volume thus amo­unts to EUR 31.25 mil­lion. The KfW risk share may not exceed eit­her 25 % of the annual tur­no­ver of 2019 or twice the wage costs of 2019 or the cur­rent finan­cing requi­re­ments for the next twelve months.

Gua­ran­tees

An alter­na­tive to the KfW loans is offe­red by gua­ran­tees, which can be assu­med by the gua­ran­tee banks for finan­cing pro­jects up to EUR 2.5 mil­lion - the gua­ran­tee level was dou­b­led due to the Corona cri­sis; pre­viously it was set to EUR 1.25 mil­lion. The gua­ran­tee ratio amo­unts to 80 %. Enqui­ries can be made free of charge to the gua­ran­tee banks. A deci­sion on amo­unts of up to EUR 250,000 is even made wit­hin three days.

For large finan­cing pro­jects with a gua­ran­tee amo­unt of EUR 50 mil­lion or more, the “large gua­ran­tee pro­gram” (Groß­bürg­schaft­s­pro­gramm) was ope­ned up to enter­pri­ses out­side struc­tu­rally weak regi­ons. Once all other finan­cing pos­si­bi­li­ties have been exhaus­ted, the Federal Govern­ment can invest in the syn­di­ca­ted finan­cing wit­hin the frame­work of a Federal/State gua­ran­tee at a ratio of 50:50; the gua­ran­tee ratio amo­unts up to 80 %.

Eco­no­mic Sta­bi­liza­tion Fund

With the Eco­no­mic Sta­bi­liza­tion Fund adop­ted on 27 March 2020, the Federal Govern­ment has set up a res­cue pac­kage for large-scale com­pa­nies. The aim is to keep com­pa­nies that were com­pe­ti­tive and had a via­ble busi­ness model before the corona pan­de­mic liquid. The Eco­no­mic Sta­bi­liza­tion Fund enab­les the Federal Govern­ment to pro­vide for gua­ran­tees of up to EUR 400 bil­lion for debt instru­ments and lia­bi­li­ties which com­pa­nies issue for refi­nan­cing on the capi­tal mar­ket. In addi­tion, the Federal Govern­ment intends to directly parti­ci­pate in the reca­pi­ta­liza­tion of enter­pri­ses with up to EUR 100 bil­lion, e.g. by acqui­ring equity capi­tal, pro­fit parti­ci­pa­tion rights or bonds. Such direct parti­ci­pa­ti­ons in com­pa­nies are only jus­ti­fied if the Federal Govern­ment has a vital inte­rest in sta­bi­li­zing these com­pa­nies. In order to ensure that state funds are used for the inten­ded pur­pose in the com­pa­nies, state parti­ci­pa­tion can be lin­ked to spe­ci­fic con­di­ti­ons, e.g. with regard to the dis­tri­bu­tion policy or the remu­n­e­ra­tion of board mem­bers.

Corona Emer­gency Assi­s­tance Pro­gram: grants for the solo self-emp­loyed and small enter­pri­ses

The Ger­man govern­ment has laun­ched a Corona emer­gency aid pro­gram for small and micro enter­pri­ses, the solo self-emp­loyed and fre­e­lan­cers. After it quickly became clear that shop and restau­rant clo­su­res would pose an acute threat to the exis­tence of small busi­nes­ses in parti­cu­lar, direct grants were deci­ded upon, which can be app­lied for at the federal sta­tes or at the bodies desi­g­na­ted by the federal sta­tes.

For up to five emp­loyees, the federal sup­port amo­unts to a one-off pay­ment of up to EUR 9,000 for three months. For up to ten emp­loyees it amo­unts to a maxi­mum of EUR 15,000. It should be noted that the grant is sub­ject to taxa­tion. This also affects the assess­ment of health insurance con­tri­bu­ti­ons.

Pre­re­qui­site for the grant is that the com­pany had not been in eco­no­mic dif­fi­cul­ties before March 2020 and that the damage was cau­sed by the corona cri­sis, i.e. after 11 March 2020. App­li­cants must demon­s­t­rate the extent to which their eco­no­mic acti­vity has been sig­ni­fi­cantly affec­ted by the corona pan­de­mic and their eco­no­mic exis­tence is threa­te­ned as a result. Anyone who deli­be­ra­tely or grossly neg­li­gently makes false sta­te­ments is guilty of sub­s­idy fraud and must expect cri­mi­nal prose­cu­tion.

The grants are inten­ded to cover cur­rent ope­ra­ting costs and their amo­unt is based on the actual liqui­dity shor­tage of the indi­vi­dual com­pany: the deci­sive fac­tor is the expec­ted tur­no­ver as well as the ope­ra­ting mate­rial and finan­cial expen­ses for three months from the date of app­li­ca­tion. The pub­lic funds are inten­ded to pay for com­mer­cial rents, loans for busi­ness pre­mi­ses and lea­sing expen­ses.

Not cove­red by the emer­gency aid are costs of pri­vate living, such as rent for pri­vate accom­mo­da­tion and health insurance con­tri­bu­ti­ons. To enable small busi­nes­ses and the self-emp­loyed to also con­ti­nue to pay these costs, the Federal Govern­ment has sim­p­li­fied the access to unem­p­loy­ment bene­fit II (Arbeits­lo­sen­geld II) for a period of six months.

Sup­port pro­gram of the federal sta­tes

In addi­tion to the federal pro­gram, nume­rous federal sta­tes have set up their own sup­port pro­grams which extend the cir­cle of those entit­led to apply to com­pa­nies with (in some cases sig­ni­fi­cantly) more than ten emp­loyees or are addres­sed to parti­cu­larly vul­ne­ra­ble sec­tors. The emer­gency aid pro­gram of the federal govern­ment can be com­bi­ned with the cor­res­pon­ding emer­gency aid of the federal state in which the com­pany is loca­ted. Howe­ver, this must not result in any over­com­pen­sa­tion of ongoing ope­ra­ting costs. If a later review/audit, e.g. in the con­text of a tax decla­ra­tion, reveals that the mate­rial and finan­cial expen­ses or the actual loss of tur­no­ver was lower than sta­ted and appro­ved in the app­li­ca­tion, the addi­tio­nal grant recei­ved must be repaid. If sub­s­idy fraud is sus­pec­ted, cri­mi­nal prose­cu­tion must be expec­ted here as well. 

Deci­sive cri­te­rion: Who is actually eli­gi­ble for fun­ding?

Only com­pa­nies that have tem­pora­rily expe­ri­en­ced finan­cial dif­fi­cul­ties due to the corona cri­sis can take advan­tage of the various govern­ment sup­port pro­grams. Back­ground is that the state sup­port mea­su­res must meet the requi­re­ments of the Tem­porary Frame­work for State aid mea­su­res to sup­port the eco­nomy in the cur­rent COVID-19 out­b­reak, which the EU Com­mis­sion adop­ted on 19 March 2020. More spe­ci­fi­cally this means, that a com­pany is only eli­gi­ble for sup­port if it was not already clas­si­fied as a "com­pany in dif­fi­culty" on 31 Decem­ber 2019 wit­hin the mea­ning of Euro­pean state aid law and the finan­cial dif­fi­cul­ties are a direct con­se­qu­ence of the corona pan­de­mic. At the end of 2019, the com­pany the­re­fore still had to have a posi­tive insol­vency prog­no­sis and mustn’t have had any dis­or­de­red pay­ment arrears. This should be docu­men­ted accor­din­gly for veri­fi­ca­tion pur­po­ses. Com­pa­nies that were already in finan­cial dif­fi­cul­ties before the out­b­reak of the cri­sis are thus affec­ted twice by the cri­sis: they have to struggle with a loss of sales and may be exclu­ded from access to govern­ment sup­port mea­su­res.