Authors: Julia Luchterhand and Raik Uhlmann, PwC
Especially in the early stages, entrepreneurs need more than just encouragement and moral support. The German government, the 16 German Federal States and the EU provide support schemes for startups. At a first glance, opportunities for public support may seem vast and quite confusing. However, there are ways to tackle them and to successfully raise substantial public incentives for one’s company. Generally, the different funding schemes are subject to constant changes and, thus, always need to be checked in terms of their topicality.
The funding schemes take the form of either – direct grants,
– public loans,
– public guarantees or
– public equity capital
In contrast to other countries, Germany does not offer tax-based incentives.
In the case of direct grants, a company typically applies for the incentive by submitting a project plan (amongst other documents) to the granting authority. Often, it is possible for companies to receive the permission to start with the project before a final decision on the application has been made. After receiving the written allowance, the company can start proving the project-related expenses to the granting authority which will pay out subsidies at a certain subsidy rate on the eligible expenses.
“Most funding schemes work on a project basis. Thus, a company needs to apply for the public support before starting a certain planned project. In many cases, starting a project too early may cause an automatic rejection of the project application. Also, check the specific criteria set out in the respective guidelines, e.g. establishing a subsidiary in Germany, project implementation in Germany, etc.”
The most typical project categories for grant schemes are:
1. Investment projects (e.g. setup of a new establishment)
2. Research, development and innovation projects
3. Projects for energy efficiency, climate protection as well as
4. Projects regarding the qualification and education of employees etc.
In terms of public loans, these typically take the form of public development loans with favorable interest rates, long maturities and, in many cases, initial grace periods before the repayment obligations kick in. Despite the fact that most offerings come from public development banks, companies usually need to apply for the public loans via their commercial house bank. In this case, a company mostly needs to apply for the public loan before starting with the project by submitting a comprehensive business plan.
Public guarantees usually serve as a way to make financing for a project possible at all. This is because commercial banks typically do not offer loans to companies which lack securities. In these cases, guarantee banks can provide the securities needed. Generally, the underlying criteria are much stricter and limiting than for grant or loan schemes. Thus, applying for a public guarantee needs to be weighed up thoroughly. In most cases, the application is already fee-based.
Public equity capital can be an attractive option for startups which consider equity capital as a suitable instrument for their corporate financing. In some cases, the issuance of public equity capital requires the existence of a co- or lead investor. The advantage of a public equity capital investor lies, amongst others, in the transparency and reliability of the investor’s strategy.
DIFFERENT PROVIDERS OF INCENTIVES
Company projects may be funded via different instruments
(Different requirements, granting authorities, application procedures, terms and conditions etc.)
Public support schemes are offered on the
– EU level
– The German national level
– The Federal State level and in some cases even on
– The municipal level within the specific Federal State.
Grant schemes on the EU level mostly cover research & development projects and usually require a very high standard of technological innovation as well as international consortia. The European loan, guarantee or equity instruments are generally issued via the member state granting bodies and can, thus, in most cases, not be applied for directly.
On the German national level, the Federal ministriesaswellastheKfW,thePromotionalBank of the Federal Republic of Germany, are the most important providers of funding schemes.
When it comes to the Federal State level, the regional development banks often offer a wide range of funding schemes. They are usually equally interesting as the instruments existing on the German national level and should be checked upon when making plans to invest in Germany, even though the language barrier may partially be a problem for the regional development banks. For this aim, the regional business development agencies help incoming investors.
The existing funding instruments are all aligned with the EU legislation on state aids. All member states of the European Union need to adhere to this legal framework. Unfair competition of regions within the EU shall be avoided by all means. Under that premise, the EU has stated certain maximum subsidy rates for the different project types, for different regions and for different company sizes, e.g. SME.
EXAMPLES OF RELEVANT FUNDING SCHEMES
GRW funding scheme
A company considering the setup of an establishment in Germany should check on the availability of grants via the “Joint Task Improvement of Regional Economic Structures” scheme (Gemeinschaftsaufgabe “Verbesserung der regionalen Wirtschaftsstruktur” – GRW). The aim of this funding scheme is to foster economic development by subsidizing the setup or expansion of the company site of certain eligible industries. The scheme mostly focuses on manufacturing companies but has widened its scope over time to include several other industries as well, such as digital or creative ones. The financial support is determined by the respective region and differs according to the company size, providing a bonus on top of the general subsidy rate (10 – 20% depending on the funding area) of 10% for medium- sized companies and of 20% for small companies. Eligible costs are either the investment-related capital expenditures for new buildings, equipment, machinery, etc. or the personnel costs during the project phase.
In order to meet entrance criteria for the funding scheme, a certain number of new jobs needs to be created and maintained by the respective establishment. Whilst funding for the GRW funding scheme is provided by both federal- and federal state level, each federal state can specify the general rulings for GRW funding scheme and declare its own rules, e.g. on eligible industries or subsidized costs. Thus, a close communication with the local granting authorities is recommended.
Research & Development & Innovation schemes
In the case of substantial investments in research, development, and innovation (R&D&I), a startup should consider checking opportunities for those activities. R&D&I subsidy schemes are either open to a large number of different industries or offer individual calls which set out specific industry-related research aims and come along with their own set of criteria.
An example of a funding scheme which does not target a specific industry is the “Central Innovation Programme for Medium Sized Enterprises” (ZIM) which is issued by the Federal Ministry for Economics Affairs and Energy.
“Check the grant you are looking at, before applying, as a lot of funding schemes offer only minor grants, and thus may not be worth the administrative effort!”
1SME definition according to the European Commission, see Annex I of EU-Regulation 651/2014, (http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0651&from=EN)
2 Subsidy rates are halved for eligible project costs above 50m EUR. Projects with a volume of more than 100m EUR need to be notified at the European Commission.
3 The German Federal Ministry widened eligibility criteria to also include companies with up to 499 employees. For more information please visit https://www.zim-bmwi.de/zim-overview.