Financing SMEs and Entrepreneurs 2020

17. Germany

Government policy response

Introduction

In general, SMEs’ access to finance is currently very good in Germany. The continued period of low interest rates has led to favourable conditions for bank finance, which is still the most important source of financing for German SMEs. Thus, the majority of SMEs report no or few difficulties to finance their investments through bank loans. However, where the market supply is not sufficient, the Federal Government provides a wide range of financial instruments to support SMEs, potential entrepreneurs and innovative start-ups so that they can implement new projects, products, processes and services.

A key area of support is broad-based support for start-up and growth projects. The focus in recent years has been on the politically important area of financing innovation and supporting venture capital for start-ups, which has greatly expanded over the last legislative period.

As a result, the German venture capital market has considerably developed over the last years. Thanks to numerous public funding programmes at the federal and the state level, Germany’s VC market has observed a very positive development, especially in the early-stage financing of start-ups. In international comparison, however, the German VC market is still relatively small. Particularly in the second and third growth phase (with financing volumes of EUR 50 to 150 million), German start-ups often face a lack of financing opportunities. One reasons for this is that there are still relatively few venture capital funds in Germany that invest in the growth phase. However, an increasing number of funds are emerging with a volume of EUR 500 million or more, which allows for larger financing rounds.

Programmes

Credit-based financing for start-ups

The ERP Special Fund provides for a differentiated and well-established system of promotional loan instruments for different start-up phases. The loan programmes [ERP-Gründerkredit Startgeld] # ERP Start-Up Loan - Start-Up Money, [Gründerkredit Universell] # ERP Start-Up Loan - Universal and [ERP-Kapital für Gründung] # ERP Capital for Start-Ups provide low-interest loans with a long maturity for start-ups as well as business succession. In some of these programmes, banks providing the financing are relieved from a portion of the credit default risk. ERP-Capital for Start-Ups provides subordinated loans with favourable interest rates in order to strengthen the company's equity base and thereby to facilitate further external financing.

ERP-Innovationsfinanzierung # ERP innovation financing

ERP Innovation financing was restructured as of 1 July 2017 with the aim to promote the digital transformation of SMEs by providing an expanded range of innovation financing, with an explicit focus on digitisation projects.

The ERP Digitisation and Innovation Loan serves to finance digitisation and innovation projects as well as investments and working capital for innovative companies. Funding goes to established commercial companies and to professional service providers. The programme has been refined further over the last year and is now also available to business starters and young companies. The funding takes the form of a low-interest loan of up to EUR 25 million per project and up to EUR 7.5 million per financing need of innovative companies. Funding is provided both for investments and for working capital. The bank processing the application can be relieved of up to 70% of its liability.

High-Tech Gründerfonds (HTGF) # High-tech Start-up Fund

The High-tech Start-Up Fund (HTGF) is an early-phase funding programme for highly innovative and technology-oriented companies whose operative business activities started less than three years ago. To be eligible for financing, projects must have shown promising research findings, be based on innovative technology, and the market situation for the product must be bright. In addition to providing capital, the fund ensures that the management of young start-ups receives the necessary help and support. An initial funding amount of up to EUR 1 000 000 is provided, with a total of up to EUR 3 million usually being available per company. In the first phase of the fund (up to November 2011), a total of EUR 272 million was available. The follow-up fund (HTGF II) provides total funding of EUR 304 million. A third fund, HTGF III, was launched in autumn 2017. In addition to the support from the Economic Affairs Ministry and the German Promotional Bank (KfW), more than 30% of the EUR 319.5 million fund has been provided by 33 private investors – either well-established SMEs or large corporations.

Mikromezzaninfonds # Micro-Mezzanine Fund

The Micro-Mezzanine Fund was launched in 2013 and provides dormant equity of up to EUR 50 000 for small companies and business starters and of up to EUR 150 000 for companies within the special target group. The fund’s special target group are companies that provide training, are operated by women or people with a migrant background, or were founded by persons who were formerly unemployed. Social enterprises operating commercially are also eligible to apply for financing on the terms of the special target group, as are companies with a focus on environmentally-compatible production. Both the European Social Fund (ESF) and the European Recovery Programme (ERP) finance the fund. The volume of the first fund was EUR 74.5 million. The current fund (MMF II) has a volume of EUR 153.2 million.

KfW Capital (German Promotional Bank Capital)

On the basis of a decision by the Bundestag, the Ministry for Economic Affairs, the Ministry of Finance and the KfW have drafted an overall concept for an organisationally independent, growth-oriented venture capital company; it started operations as “KfW Capital” in October 2018. KfW plans to double the annual amount of funding provided by KfW Capital to EUR 200 million by 2020. This initially takes place primarily via investments in venture capital funds, particularly as part of the ERP-VC Fund Investments programme, which has been in place since 2015. In addition, KfW Capital is a partner in the High-tech Start-up Fund and coparion. Finally, KfW Capital aims to improve the quality of the venture capital funding. The aim is to develop a product structure in which the individual financing phases are coordinated throughout the entire company lifecycle. In total, the expansion should result in funding commitments of around EUR 2 billion in the next ten years or so.

Venture Tech Growth Financing

At the end of 2018, the KfW programme Venture Tech Growth Financing commenced operations. As part of this programme, the German Promotional Bank (KfW) can issue EUR 50 million of venture capital loans to innovative fast-growing tech companies each year. Over the entire funding period, EUR 500 million in funding will be made available together with private-sector investors to start-ups in the growth phase.  

INVEST–Zuschuss für Wagniskapital # INVEST – Grant for Venture Capital

INVEST is a grant programme run by the Federal Ministry for Economic Affairs and Energy. It has been set up in 2013 and was further developed in 2017 to support private investors who want to acquire a stake in young and innovative companies. Under this programme, business angels that invest in innovative start-ups receive an acquisition grant worth 20% of the sum invested. In addition, natural persons can receive an exit grant if they sell their shares. The amount provided is equivalent to 25% of the capital gains from the sale and thus more or less covers the tax imposed on the profit from the sale. The shares must be held for a minimum of three years. Both grants are tax-free for the investor. Funding can be provided for a maximum of EUR 500 000 of investment per investor and per year. The maximum amount eligible for funding that can be invested in a single company per year is EUR 3 million.