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.
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.