Support for start-up companies in the Covid-19 crisis

The Covid-19 crisis is impacting on all businesses across Germany including the dynamic German start-up scene. In this article we outline some of the more important measures taken by the German government to support start-ups through the crisis. These measures include providing immediate financial support, loan finance, subsidies for short-time work schemes, relaxation of management obligations to file for insolvency, tax relief schemes and the suspension of social security payment obligations. Bridging finance schemes are also currently in great demand, some of which we will also briefly examine.

Immediate financial help in the form of grants

The German government will extend non-repayable emergency financial aid, which are taxable subsidies:

• up to EUR 9,000 one-off payment for 3 months for start-up companies with up to 5 employees (full-time equivalents);
• up to EUR 15,000 one-off payment for 3 months for start-up companies with up to 5 to 10 employees (full-time equivalents).

State-backed loan programme

Depending on the size of the company, loans are available for up to:

• the annual wage bill for 2019;
• 25 % of the annual turnover in 2019; or
• the specific liquidity needs of the company for the next 12 or 18 months.

The company must have been incorporated for at least three years and be able to provide annual financial statements for the past two financial years. For companies which have been incorporated less than three years ago, the German government has set up the ERP Start-Up Loan – Universal (EPR Gründerkredit – Universell).

As well as providing loans, the German government is making available guarantees for up to EUR 2.5 million. Regional governments are also able to provide guarantees for up to 80 % for new loans leaving the company's house bank with not less than 20% of the credit risk. Applications can be made online.

Short-time work compensation

If the company decides to introduce a short-time work scheme for its employees, the scope of employment of inpidual employees will be reduced. The German state employment agency will pay up to 60 % (67 % for employees with children) of the flat-rate net salary of the employees affected by short-time work. Any social security contributions incurred are also subsidized by the German government.

Corporate insolvency

The obligations imposed on managers to file for insolvency have been suspended until 30 September 2020. This is a general rule which will apply unless the reason for the insolvency is not the Covid-19 pandemic or there is no prospect of the company being able to pay its debts in the future.

Managing directors are personally liable for payments made by a company if it is insolvent. If, however, their obligations to file for insolvency are suspended because the grounds for insolvency stem from the Covid-19 pandemic, the usual payment prohibitions do not apply. Payments made in the ordinary course of business, in particular payments which serve to maintain or resume business operations or to implement a restructuring plan, are to be treated as compatible with the diligence of a prudent and conscientious manager so no personal liability arises.

The act also restricts creditors rights to file for insolvency against their debtors. Creditor applications filed within three months of the law coming into force will only be allowed to proceed if the grounds for insolvency existed on 1 March 2020.

Tax and social security

Companies which are affected by the Covid-19 pandemic may qualify for income tax, corporation tax and turnover tax relief; they can also apply for deferral of taxes already due or which will become due.

Economically significantly affected companies can apply for a deferral of social security contributions if their payment would cause significant financial difficulties for the company. Companies may apply for the deferral at the respective health insurance company.

Bridge financing

As well as the measures introduced by the state to support start-ups, it is still worth considering other financial instruments which may be available. These could include convertible loans or mezzanine financing structures such as participatory loans, profit participation rights or silent participations. The advantage of these options being that potential investors can participate in the later success of the start-up company in the long term and not just in an emergency funding mechanism for the crisis. There are regulatory regimes which need to be complied with so appropriate advice must be taken.