A limited liability entrepreneurial company (UG) is a special type of German limited liability company (GmbH) that can be incorporated with less seed capital. Still, no matter how much share capital they have, UGs might need financing from time to time. For example, they might require additional funds for investments, growth, or to shore up liquidity. The most obvious option here is a traditional bank loan.

In this article, you’ll learn why banks might reject loan applications from small businesses, how the eligibility criteria are different for UGs compared to GmbHs, and what documents financial institutions typically require. We’ll also explain what alternatives UGs have and how you can improve your chances of being approved for funding.

Key takeaways

• Banks primarily weigh up a UG’s financial situation, risk of default, and ability to repay before awarding a loan.
  
• Having a weak equity base or being unable to put up any collateral can often make it harder to obtain financing, especially for young businesses.
  
• Loan eligibility criteria are largely similar for UGs and GmbHs, although the lower share capital of UGs can increase the weight given to own funds and securities.
  
• Alternatives to traditional bank loans include promotional loans, equity financing, venture capital (VC), and revenue-based financing.
  
• Conducting realistic financial planning, ensuring complete documentation, and illustrating clearly what you intend to do with the loan can all improve your chances of approval.
  

Why do banks reject loan applications from small businesses?

Banks review business credit applications in Germany carefully because they need to evaluate the risk of default. During their review, they assess the business’s financial situation, its history, and its expected repayment capacity. They also consider the recoverability and enforceability of any collateral.

One reason small businesses often struggle to obtain loans is a weak equity base. If a business has a small amount of own funds, this could indicate to the bank a greater reliance on debt capital. At the same time, small businesses sometimes have fewer valuable assets to put up as collateral.

Example of a UG

A UG is a special type of GmbH which, as a corporate entity, has its own legal personality. It can be formed with share capital of under €25,000. UGs thus make it comparatively straightforward for founders with limited seed capital to form a limited company—which can become an issue when applying for loans. A newly incorporated UG often has modest funds, little history, and cannot provide several years of annual financial statements. This means the bank has less information to assess the applicant’s future solvency. The same is largely true of startup financing, where financial institutions cannot rely on reliable figures from previous financial years. Moreover, the limited liability structure of a UG generally means that its members’ private assets cannot be touched if the business fails to fulfill its obligations.

Other reasons why applications are rejected

Sometimes, loan applications fail because a business is seeking to borrow beyond its means. Negative payment history, high borrowing from other lenders, or stressed liquidity can also influence decisions. The wider economic landscape plays a role as well. Higher default risk and lower risk tolerance can prompt banks to tighten credit standards.

How do loan eligibility criteria differ for UGs compared to GmbHs?

Because the two legal forms are similar, loan eligibility criteria for UGs and GmbHs differ little. One main difference, however, is share capital. While a GmbH must have share capital of at least €25,000, a UG can theoretically be formed with as little as €1.

When reviewing UG applications, lenders pay closer attention to the company’s financial situation, its solvency, and any additional collateral. A higher equity ratio can improve financial stability and reduce the bank’s default risk. Yet, the nominal share capital alone doesn’t tell the lender much about the company’s actual financial health: a UG with low share capital might have other equity, assets, and stable turnover.

Potential collateral includes fixed assets, open invoices, or sureties. The need for security depends on the loan amount, the purpose of the financing, the bank’s risk assessment, and other factors. If an applicant lacks sufficient collateral, they can use additional securities or third-party sureties to support the loan. Members, business partners, friends, or family members, for instance, can put up additional collateral or act as guarantors.

Personal credit ratings

Lenders might review the personal credit ratings of the people behind the business, not just the company’s financial situation, especially if members or managing directors are personally liable for the loan or act as guarantors. Applicants with significant personal liabilities or negative credit scores might find it harder to obtain funding. For example, credit checks for a Credit Institute for Reconstruction (KfW) loan for a UG could include records from SCHUFA, the General Credit Protection Agency. Business owners need to check their own credit scores before applying for a loan and clear any negative markers on their record early.

Purpose of financing

When a UG applies for a loan, the planned financing must match both the business and the intended use of the funds. The bank will assess what the UG intends to use the loan for and whether its anticipated earnings will be enough to cover its repayments and interest. Regardless of the legal formation, a well-defined, comprehensible funding concept can help to illustrate the financial viability of the intended project. When reviewing applications for both UG and GmbH loans, lenders conduct a holistic assessment of the intended project, the business’s financial health, and the available collateral.

What documentation does a UG need to apply for a loan?

Applying for a loan as a UG involves submitting numerous documents to the bank that show the business’s financial position. Documentation requirements vary depending on the amount the applicant wants to borrow, the purpose of the financing, and the business’s stage. Financial institutions typically request the following documents:

• Annual financial statements: For existing UGs, balance sheets and profit and loss statements are used to assess the venture’s past performance.
  
• Business analyses (BWA): An up-to-date BWA gives the bank insight into the current financial growth of the business.
  
• Business plan: For newly incorporated UGs, in particular, a detailed business and financing plan can help illustrate anticipated growth and financing needs.
  
• Liquidity planning: An overview of expected earnings and expenditures shows whether the UG will foreseeably be capable of satisfying its repayments and interest payments.
  
• Evidence of collateral: If fixed assets, receivables, or other collateral are being put up, the bank might request appropriate evidence.
  
• Corporate documents: Banks can also request the partnership agreement, a copy of the Commercial Register record, and information on the business’s members and managing directors.
  

What are the alternatives to bank loans for UGs?

Not every UG has to take out a traditional business loan to secure the financing they need. Other funding structures can be viable methods depending on its phase, business model, and capital it needs. Therefore, both young and established enterprises need to compare options before taking out a UG loan. Some of these alternative financing options are:

• Founder and promotional loans
  Public development banks such as the KfW offer special loans for startups, investments, and expansion. For UGs, these loans can be an attractive alternative to traditional bank loans because they offer favorable interest rates, long maturities, and sometimes initial payment holidays.

• Equity financing
  Equity financing is where investors provide capital and receive shares in the UG in return. This type of financing could be particularly attractive for companies with high growth potential.

• VC
  VC firms invest predominantly in young businesses with high growth potential. Beyond providing funds, they can offer know-how and networks. In return, they receive stakes in the business and potentially decision-making rights, and participate in the financial ups and downs of the operation.

• Private equity
  Private equity investments mostly target established businesses and might be used for growth, restructuring, or other expansions. Here, too, UGs receive capital and potentially strategic support, but must give up stakes in the business and certain decision-making rights in return.

• Revenue-based financing
  With revenue-based financing such as Stripe Capital, businesses receive funds and pay it back as a fixed percentage of their regular revenue. This approach can be particularly useful for UGs with fluctuating earnings.

• Crowdinvesting
  Crowdinvesting lets multiple private investors pool resources and provide funds to a business through an online platform. Depending on the model, they receive a stake in the business or some other form of financial consideration in return.

• Crowdfunding
  Crowdfunding is when capital is obtained from many individuals for a specific project or undertaking. Depending on the model, funders might receive products, rewards, or other considerations.

What are the pros and cons of a traditional UG loan vs. alternative financing?

For UGs, bank loans offer many advantages. That said, there are also some drawbacks that businesses need to think about carefully:

Pros of bank loans

• Maintain full ownership
  Unlike VC or equity financing, UG members retain full control of the company. The bank does not take any stake in the business or gain any decision-making rights.

• Predictable repayments
  With a traditional UG loan, the contract usually defines interest, maturity, and repayments when it is concluded. This makes financial and liquidity planning easier.

• Financing larger investments
  A bank loan can cover larger investments and longer-term projects. A UG loan can finance machinery, equipment, real estate, expansions, and more.

Cons of bank loans

• Lengthy application process
  Banks require lots of different documents and will review the business’s financial position. Depending on the lender and type of financing, alternative models might have fewer formal requirements and, in some cases, offer quicker, easier access to funding.

• Credit check
  Anyone applying for a loan for their UG usually has to demonstrate that the business is sufficiently solvent. But young UGs, in particular, don’t have an extensive financial history, which can make approval harder.

• Collateral
  Depending on the borrowing amount and the financial institution’s risk assessment, collateral might be required. A young UG with little equity and few exploitable assets could be at a disadvantage here compared to more established businesses.

• Fixed payment obligations
  Unlike revenue-based financing, traditional loans generally must be repaid with interest regardless of the borrower’s actual turnover. That increases the financial strain on businesses experiencing temporarily weak liquidity.

How can UGs improve their chance of getting approved for financing?

A realistic financial plan is a major factor in a successful loan application. The amount the UG requests must match its size and actual capital needs. Accordingly, anyone applying for a loan for a UG must clearly show how much financing they need, what they intend to use the funds for, and why the amount they are applying for is appropriate. A well-substantiated application makes the bank’s job easier and reduces the chance of requesting unrealistically high funding.

It’s also important to prepare the application in advance. Instead of simply reacting to bank requests, the UG can compile all the relevant information in a well-organized format. That includes preparing an overview of existing borrowings, key contracts, or a concise explanation of the business model. For young enterprises, in particular, it helps to explain the business journey and map out next steps to paint as complete a picture of the UG as possible.

It might be helpful to seek assistance from third parties. Tax advisors, for example, can help prepare company data or financial plans and identify inconsistencies before submission. Management consultants and other experts can also help prepare and structure the funding request. Professional preparation can be a main deciding factor for businesses submitting their first major financing application or UGs looking to obtain a loan.

How Stripe Capital can help

Stripe Capital offers financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a flex loan, line of credit, or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.

• Align financing with your revenue: Capital’s flexible structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.

• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.

• Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payment data.

Learn more about how Stripe Capital can fuel your business growth, or see if you are eligible today.

FAQs on UG loans