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Debt financing

Bank loans are the classic form of debt financing. These are available from your local bank.

Note: In addition to local loans from banks and savings banks, there are various development loans available at federal level from development banks, such as the L-Bank in Baden-Württemberg or the KfW Mittelstandsbank. Development loans often have long maturity terms and grace periods of a number of years. Development loans are also available from your local bank. Detailed information is available from the individual banks.

The following forms of credit are available:

  • Investment loan For the financing of land, buildings, construction work, equipment, machinery, facilities, vehicles, investments in companies, company acquisitions
  • Operating loan For the financing of warehouse stock, pre-financing of orders, research and development applications, expenses for market development, cover for sales shortfalls and losses
  • Overdraft facility Credit facility for the business account for current payments
  • Guarantee credit Credit facility for guarantees that the local bank undertakes in favour of the company (e.g. guarantee bonds; if the guarantee is not called in, no money goes to the company in the case of the guarantee credit)

You usually need securities for loans that limit the risk for the credit institution. Securities are assets (e.g. property, rights, claims) that you provide to the local bank for a limited period of time. The local bank terminates the loans if the interest and capital payments are not made as agreed. You can use the securities and cover the deficit with the revenue obtained.

Forms of collateral include the following:

  • Pledging of capital investments (fixed deposit, savings book, stocks, shares, funds), credit balances from building society savings, life insurance
  • Mortgages on property These are entered in the land registry. They are not linked to a specific loan. You can therefore also use them as security for other claims.
  • Guarantees from third parties (private individuals, companies)
  • Guarantee from the Bürgschaftsbank Baden-Württemberg
  • Assignment of machinery, vehicles or similar by way of security The machinery belongs to the bank, but you have the right of use.
  • Assignment of claims against customers You hand over claims against customers as security to the bank. This may be
    • the claim for a single order (large order that was pre-financed with a loan) or
    • all existing and future claims of all customers.
  • If there are insufficient business assets, you must provide securities from private assets.

You need to convince the bank in a financing meeting that you will make money with the company in the medium term. Banks want to incur the lowest possible risk. The more trustworthy and creditworthy you are, the greater the chance that you will receive the desired level of bank loan. The bank will want to know who they are dealing with, the basis of the business concept, what their money will be used for and whether repayment seems possible in the agreed time period.

A long-term good relationship with the local bank is an excellent prerequisite. This should not put you off checking out offers from other banks. The meeting with the bank should take place before setting up the company, not when the company urgently needs money.

Tips for choosing your local bank:

  • Existing banking relationships should be used: The first point of contact should be the bank or savings bank where you already have a bank account. Since they are already aware of your financial situation, this makes it easier to enter into negotiations, except if your current account is permanently overdrawn.
  • Not every bank finances companies: There are institutions that exclusively specialise in private banking. Business start-ups do not generally get loan financing for their company from these institutions.
  • Regional institutions finance most business start-ups: Very many business start-ups are financed by regional institutions, such as savings banks and cooperative banks. Consequently, they have lots of experience with business start-ups. They are also very familiar with the local conditions. For example, they know from their own experience which business start-ups in their region were successful in the last few years and which weren't.
  • Achieving a long-term banking relationship: Many small companies are associated with their local bank for a “lifetime”. If they want to change their bank, this needs to be declared at the new bank. The bank collects information about financing habits over time, for example, whether loans are paid back on time or how often the overdraft facility has been used. This information provides a rating that forms the basis for any further lending. The respective businessperson is assigned to a higher risk category without this information.
  • Asking the bank for industry-specific know-how: The chosen credit institution should be very familiar with this industry and financing requirements. There are credit institutions that specialise in a specific target group , such as the Ärzte- und Apothekerbank.for the medical profession. If the company has international customers, for example, and wants to export a lot, the bank must be familiar with financing requirements abroad.
  • Comparing conditions and services: You should always compare the services and conditions for loans at the different institutions and negotiate the loan terms in good time.

Tips for preparing for a meeting with the bank:

  • Develop a coherent and realistic business concept as a first step. Demonstrate how your concept can be successfully marketed. Write a business plan!
  • Prepare other documents: CV, certificates, list of securities, proof of available equity capital etc.
  • Arrange to talk to a business start-up adviser before visiting the bank. Business start-up advice is available from the Chambers of Trade, Chambers of Industry and Commerce, local business development agencies and various business-start up initiatives.
  • Bank employees are (also) impressed by figures. Prepare a list of your capital requirements and a plan of your turnover and costs (profitability forecast) (should be part of the business plan).
  • Draw up a financial plan for the company with a few safety margins. This plan should set out optimistic assumptions about the development of the business and also provide pessimistic figures.
  • Familiarise yourself with the appropriate development loans before the meeting so that you can ask the bank specific questions about them. Please remember that it is essential that the specified terms for development programmes are observed (several weeks can elapse between the application and payment).
  • Contact a business-start up specialist. The loan officer at a small branch of the bank is usually the wrong person to speak to. Many banks and savings banks have set up their own teams for business start-ups.
  • Negotiations should be carried out in a self-confident, open and honest manner. Justify your project with good factual arguments.
  • Expect to be asked critical questions and respond in a calm and relaxed fashion.
  • No investments should be made before the meeting at the bank.
  • View the bank as a long-term partner for your company and maintain close contact with your bank even after the loan is granted. The bank should regularly receive information about the current developments in the company. The accounting should always be kept up-to-date.
  • Check lists and guidelines for the financial planning will help you to prepare for the meeting.

Financing tips

  • Agreeing an overdraft facility: An overdraft facility is a credit facility for the business account through which all current payments are handled. The overdraft facility is comparable to an overdraft facility for a private current account. Bankers also talk about an overdraft loan or a current account credit. Interest must only be paid if the overdraft facility is actually used. The overdraft facility serves as short-term financing, but not for fixed assets or for long-term elements of the working capital.
  • The term of the loan should be geared towards the period of use: You should always choose a loan term that more or less equates to the period for which the investment is to be used. For example, 5 years for a machine, 3 years for a business facility or for vehicles, 10 years and longer for property. Bankers speak about “term-congruent financing”. As a golden rule: Investments that stay in the company for a long time, such as equipment, machinery or company vehicles, should be financed with long-term loans. Operating resources, goods etc., namely things that remain in the business for only a short time, should be financed with medium-term loans.
  • Do not choose too long a loan term: It may be tempting to choose a long loan term and therefore keep the repayment instalments low in the initial phase. After all, this improves your financial solvency. But a long repayment term increases the cost of your bank loan. Firstly, the interest rates for longer terms are slightly higher than for short loan terms. But more importantly, the interest payment is calculated on the basis of a much higher residual debt.

Release note

The German original version of this text was drafted in close cooperation with the relevant departments. The Wirtschaftsministerium released it on 03.06.2024. Only the German text is legally binding. The Federal State does not assume any liability for the translated texts.

In cases of doubt or if you have any questions or problems, please contact the relevant authorities directly.