German Government Covid-19 funding measures – what is available to Fintechs?

As a global firm we have actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work this is the second in a series of posts focusing on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in Germany (from SMES to start-ups). 

Public support funding measures

The German Government has issued a series of public support funding measures in the course of the Covid-19 crisis, including emergency aid for small businesses, numerous loan schemes of the state development bank “KfW”, guarantees by the federal government and the Federal States, immediate grants offered by the Federal States, the set-up of the Economic Stability Fund (ESF) and most recently its planned support programme for start-ups (read more). 

Some instruments such as the ESF explicitly are limited to companies of the “real economy” which could exclude Fintechs (depending on the level of regulation). However, the KfW loan schemes are not limited to the real economy and should also be available to Fintechs. Nevertheless, Fintechs may not be able to benefit from some of these schemes since, in addition to eligibility criteria to be met with regard to the size of the company, they might not meet criteria relating to the financial liquidity (proof of profit) required before the Covid-19 crisis affected the economy.

Measures for Fintechs

In our view, in particular the following support measures could be interesting for Fintechs:

Emergency aid for small businesses:

To ensure the liquidity of small companies, the German Government offers a one-off payment for up to EUR 9,000 for companies with up to 5 employees and EUR 15,000 for companies up to 10 employees. The exact amount depends on the liquidity needs of the company in question. These funds do not have to be repaid. 

KfW Start-up loan – universal:

The loan schemes of KfW provide access to liquidity for sound and healthy companies, which might, however, be in financial difficulties due to the Covid-19 crisis. Under the KfW start-up loan, KfW will assume a portion of the risk from client facing banks through back-to-back loans.

The criteria for eligibility of the KfW Start-up loan are:

  • The loan scheme is only available to companies that have been on the market for less than 5 years and which have temporary financing difficulties due to the COVID-19 crisis.
  • The companies must not have met the EU definition of “undertakings in difficulty” on 31 December 2019.
  • The loan may be used for investments that promise sustainable economic success, such as operating resources, warehouse, or acquisition of assets from other companies, including takeovers and active participations. The loans may not be used to refinance existing exposures, for follow-up financing or prolongations or to repay drawings on existing credit lines.
  • Companies in which banks have a stake of more than 25% are not eligible. However, companies in which private equity investors have an interest (regardless of the size) are eligible.
  • German companies which would like to benefit from this scheme will be asked to suspend profit and dividend payments for the term of the loan in order to qualify. However, standard remuneration for business owners remain possible.

For SMEs, KfW assumes 90% of the credit default risk, provided that the company has been active for three years. The size of the scheme is generally unlimited, however, the size of the loan is limited to a certain percentage of the companies’ annual revenues / wage costs and to EUR 1bn per group. The specific interest rate depends on the term of the loan, the loan amount, the provided collateral and the specific investment purpose. Enterprises which have been on the market for more than five years could apply for the KfW Entrepreneurial loan, which has similar eligibility criteria. 

KfW Immediate loan scheme:

Further, the German Ministry of Finance has announced the KfW “immediate loan” scheme. Under this scheme, the risk assumption by KfW will be extended to 100%. It applies to companies with more than 10 employees who have been active in the market since 1 January 2019. The eligibility criteria are similar to the ones for the KfW start-up loan. In addition, the immediate loan scheme requires that the company has reported a profit on average over the last three years (or a shorter period if it has not yet been on the market for three years).

Under the immediate loan scheme, the bank receives a 100% risk assumption from the KfW, secured by a guarantee from the Federal Government. The loan is approved without further credit risk assessment by the bank or KfW and can therefore be approved quickly. The amount of each loan is limited to up to 3 months' turnover in 2019 (max. EUR 500,000/800,000, depending on the size of the company).

Specific support programme for start-ups2:

The Federal Government has decided to invest around €2 billion in a joint fund by way of co-financing (the Corona Matching Facility), to expand venture capital financing so that financing rounds for promising innovative start-ups from Germany can continue to take place. The programme was officially launched on 30 April 2020. According to the Ministry of Finance, the following measures or ‘pillars’ will be implemented under this scheme:

  • Strengthening venture capital investors at fund level:

    - The first pillar aims to strengthen venture capital investors at fund level (through the umbrella funds KfW Capital and the European Investment Fund) to provide additional capital to portfolio companies facing liquidity problems.

    - VC funds may 'match' the public resources in a ratio of up to 70% to 30% of the aggregate funding,1 provided that other private investors who do not benefit from the CMF also participate in the respective financing round.

    - A start-up can receive a maximum of 50% of its funding from the CMF, per financing round. The VC funds (and not the start-ups) can apply for the CMF. The successful completion of a due diligence process is a prerequisite for making use of the CMF. 
  • Additional support for other start-ups/SMEs:

    - The second pillar aims at supporting young start-ups and SMEs without access to the CMF, through collaboration with the Federal States.

    - It is intended to provide venture capital through associations of the federal states or through state development institutes so that they can then pass on the funds to start-ups and small SMEs via their network.

    - The risk will be shared between the federal government or the federal states and private investors. Further details on risk-sharing are yet to be provided.

The full eligibility criteria and conditions for these measures have not been published yet. We will provide an update to this post when they are available.

Economic Stability Fund:

The guarantees and recapitalisation measures which can be granted under the ESF are generally limited to large companies which exceed the criteria of SMEs. That said, the recapitalisation measures (including debt and equity instruments) can, at the discretion of the committee of the ESF, be extended to start-ups, provided that these have been valued with at least EUR 50 million in at least one funding round by private capital investors since 2017.

However, the measures will only be granted to companies of the “real economy”. Whilst this term explicitly excludes credit institutions, it is not entirely clear-cut whether partly regulated entities such as Fintechs will also be excluded. In any event, the recapitalisation measures will be granted at the discretion of the committee of the ESF.

1. This proportion of co-funding will be: up to 70% provided by the government through the CMF, and 30% contributed by the private investors.
2. Further details regarding eligibility criteria for SMEs under this pillar of the scheme are yet to be provided.