“Banks often get cold feet when it comes to leapfrog investments—but we don’t,” says Stephan Jansen, managing director of the Association of German Guarantee Banks (VDB). A bridge investment is needed, for example, when a company is planning to acquire another business or has a very large order coming up that requires upfront investment.
Guarantee banks support entrepreneurs, freelancers, and the self-employed with loan financing by providing collateral—in the form of a guarantee. “Typically, banks approach us, for example, when they believe the borrower doesn’t have enough collateral,” says Jansen. Up to 80 percent of the loan amount can be guaranteed, up to a maximum of 1.25 million euros.
Costs That Pay Off
For the entrepreneur, a guarantee—which is either a prerequisite for a loan or at least makes it more favorable—incurs additional costs: between 0.8 and 1.5 percent of the loan amount as an annual commission, plus a one-time processing fee of one percent of the guarantee amount. “The bottom line is that it can still be more cost-effective for the borrower; after all, with a guarantee backing them, they can negotiate a lower interest rate on the loan, so that the savings on interest exceed the commission,” says Jansen.
In Germany, there are 17 guarantee banks, each with numerous shareholders—trade associations, chambers of crafts, industry, and commerce, private banks, state savings banks, as well as Volksbanks and Raiffeisenbanks. Each guarantee bank is backed by up to 130 associations or other institutions. They were established about 60 years ago as self-help organizations for small and medium-sized businesses; they, in turn, are secured by government counter-guarantees.
Guarantees with a Major Impact
Last year, for example, more than 6,700 guarantees were issued, meaning that guarantees totaling 1.12 billion euros were provided for a loan amount of 1.66 billion euros. But the impact is even greater. Jansen: “An entrepreneur might have no trouble obtaining a real estate loan, but financing the high-bay warehouse to be built there fails due to a lack of collateral—and as a result, the entire project falls through. What we make possible with these guarantees amounts to two to three times the loan amount—that is, around five billion euros.”
Typically, the number of guarantees issued per year is around 7,000. According to Jansen, the fact that there were about five percent fewer in 2013, while the volume increased by four percent, indicates an overall healthy financing situation for companies. During the financial crisis from 2008 to 2010, the institutions provided guarantees for 9,000 loans totaling 2.2 billion euros. Subsequently, the number of guarantees returned to the long-term annual average.
Of course, the guarantee banks also require collateral from entrepreneurs; in this respect, they have the same requirements as the entrepreneurs’ primary banks. Nevertheless, there are differences, which Jansen explains as follows: “Unlike with primary banks, the past is less important to us. We look to the future.” If an entrepreneur has previously gone bankrupt, that alone is not a reason to deny a guarantee. “What’s important to us is that an entrepreneur can demonstrate their ability to service debt. We speak with every applicant to find out whether they have the ‘entrepreneurial gene’ or whether their plans might be too ambitious,” says VDB Managing Director Jansen.
One in Five Is Rejected
The rejection rate averages 20 percent: For one in five entrepreneurs or startup founders whose bank requests a guarantee, the guarantee banks are unwilling to provide one. In some cases, this is due to formal reasons. “For example, we do not provide guarantees for existing loans,” says Jansen. Or the borrower’s ability to service the debt is not considered sufficient.
Default rate stands at 2.5 percent
Nevertheless, defaults occur time and again—about 2.5 percent of the portfolio annually, which consistently comprises around 50,000 companies and a guarantee volume of 5.6 billion euros. Jansen suspects, however, that this figure has fallen slightly in recent years, primarily thanks to the high-quality advisory services available. The association sees its role as stabilizing companies in times of crisis or providing new funding.
Start-ups in the New Federal States
For smaller amounts, companies and self-employed individuals have the option of first contacting the guarantee bank and applying for a so-called “guarantee without a bank.” This is an option for smaller loan amounts and when an entrepreneur wishes to take advantage of in-depth consulting services. Entrepreneurs from the new federal states make significantly greater use of this option, which should be viewed in the context of a traditionally different financing landscape. The reason: Start-up entrepreneurs face greater difficulties in raising capital anyway. “In the new federal states, the share of ‘guarantees without a bank’ is 50 to 60 percent; in the old federal states, the share is only ten percent,” says the VDB managing director. The costs are slightly higher than for other guarantees, as the administrative effort involved is greater. “We speak with each entrepreneur at length and help them draw up their business plan,” says Jansen. This way, everyone involved is on the safe side.
