Businesses in Germany can raise capital in many ways to cover costs or finance growth. Some options can be used in a variety of situations, while others are better suited to specific use cases. Working capital loans fall into the latter category.

In this article, we explain working capital loans, including how they work and their legal regulations in Germany. We also detail when working capital loans are most appropriate for businesses and clear up some common misconceptions.

Key takeaways

• A working capital loan is a short-term loan businesses use to cover ongoing costs, such as salaries, rent, or purchases of goods.
  
• They are generally repaid using the business’s regular earnings, which gives businesses the flexibility to manage short-term gaps in liquidity.
  
• Working capital loans are often granted as either overdraft facilities with flexible lines of credit or fixed-term loans.
  
• Interest rates, maturities, and collateral are largely determined by the business’s credit rating and general economic situation.
  
• In Germany, there are specific laws and regulations that influence loan decisions and reviews, such as the German Commercial Code (HGB), German Banking Act (KWG), and the Minimum Requirements for Risk Management (MaRisk).
  
• Working capital loans are best for short-term financing needs, while long-term investments are typically financed through other types of credit.
  

What is a working capital loan?

A working capital loan is a short-term business loan that a business uses to finance ongoing operations. Businesses in Germany typically use this type of loan to pay for salaries, rent, purchases of goods, or raw materials. Unlike a classic investment loan intended for long-term acquisitions, a working capital loan is used to cover a business’s daily operating expenses.

Working capital loans typically have short terms and are repaid using the business’s regular earnings. This gives businesses the flexibility to manage temporary gaps in liquidity without tying up capital long term.

Working capital: Definition

Working capital includes all resources required to keep business operations running. This includes short-term assets and current expenses, such as materials, supplies, office equipment, staff costs, and lease payments. These resources are regularly used in the production or service process and are frequently depleted. Working capital is not the same as capital assets, which remain with the company long term and are used on a permanent basis.

Working capital is important for the continued performance of a business. Requirements vary between industries and are frequently subject to seasonal fluctuations. Working capital ensures that business processes run smoothly without interruption and that services can be delivered reliably.

Working capital is also not the same as working materials. Working materials are the tools and equipment employees use for their work, such as computers or manual tools. Working capital is broader and encompasses all resources that enable the business to function.

How does a working capital loan work?

In practice, banks often provide working capital loans in the form of overdraft facilities. These are credit lines on business accounts where banks grant companies fixed credit limits. This is similar to overdraft protection for personal banking customers. Within this limit, the business can flexibly use and repay the loan on an ongoing basis. Interest is generally charged only on the amount actually used.

In addition to flexible financing, many banks also offer working capital loans as fixed-term loans. A set amount is paid out as a single lump sum that is paid back in full within the agreed term. This option is especially effective for clearly defined financing needs.

Interest and term

Interest is calculated according to a variety of factors, such as the term of the loan and the lending model selected. The business’s credit score and risk profile also have a major impact on the interest charged on a working capital loan. Lending banks will usually assess the business’s financial situation by looking at business analyses, annual financial statements, and liquidity plans.

Since working capital loans are short-term loans, the term is typically 3–24 months. They are usually repaid using the business’s operating income, which means that working capital loans are closely linked to the business’s actual cash flow. The terms and interest rates for working capital loans are determined by several economic and contractual factors.

Collateral

Some banks require collateral before issuing a working capital loan to reduce debt risks. Typical examples include providing third-party sureties or assigning the business’s receivables to the bank. Factors such as the amount borrowed and business’s risk profile determine the type and amount of collateral required.

Applying for a working capital loan

The application for a working capital loan follows a clear, structured process. We have summarized the most important steps below:

• Analyze business needs
  Assess the business’s regular costs, future expenses, and potential fluctuations in earnings. Use these figures to calculate how much to borrow and ensure the business doesn’t borrow more than necessary.
  
• Compare offers
  Compare the terms offered by different banks and financial institutions by using online comparison sites or consultancy services. Focus on interest rates, term, repayment models, and applicable fees.
  
• Prepare documentation
  Compile the documentation required to verify credit scores and the business’s financial situation. Providing complete and informative documentation can increase the chances of being awarded a loan.
  
• Submit the loan application
  Submit the loan application to the bank. Fill in the forms correctly, and include the necessary attachments.
  
• Receive the loan decision
  Once the bank reviews the documentation, it will make a decision. If the application is successful, the bank will pay out the loan or set up the line of credit.
  

Working capital loans in Germany

Working capital loans play an important role in the short-term financing of ongoing business operations in Germany. However, businesses must be familiar with the legal regulations and banks’ terms and conditions to apply for loans correctly.

Legal framework

Section 247 of the German Commercial Code (HGB) distinguishes between current and noncurrent assets on balance sheets. This is important for loans because working capital loans typically cover ongoing needs related to current assets and operating expenses, while long-term investments tend to be financed through investment loans. Whether expenses are recognized as expenses or capitalized as acquisition or production costs depends on the valuation criteria in Section 255 of the HGB, among other factors.

Banks in Germany are subject to the German Banking Act (KWG). In particular, Section 25a requires them to ensure that they comply with the relevant regulations and undertake appropriate risk management.

The Federal Financial Supervisory Authority (BaFin) outlines the Minimum Requirements for Risk Management (MaRisk). These requirements contain provisions on processes relating to banking, documentation, and continuous oversight.

The equity requirements of the Basel regulatory framework also impact loan decisions. This includes Basel III and its finalization, which is often referred to as “Basel IV.” In the EU, these provisions are implemented by the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD), most recently through CRR3 and CRD6. In practice, this often means banks require reliable documentation and clear rationales for liquidity and repayment.

Role of the principal bank

In addition to the regulations discussed above, a business’s principal bank often plays a key role with working capital loans in Germany. In general, a business maintains its closest relationship with its principal bank, and this bank knows the business’s financial situation, cash flow, and processes.

This close relationship makes it easier to check the business’s credit, outline terms and conditions, and assess whether collateral is required or not. The principal bank can also adjust lines of credit or fixed-term loans to the business’s actual needs.

Challenges for businesses

Working capital loans frequently involve extensive documentation and lengthy review processes. Some banks also work with fixed payment plans. This can be impractical for businesses with seasonal revenue, short inventory turnover cycles, or irregular cash flows.

In addition, interest can be an issue. A higher interest rate can have a noticeable impact on the costs of financing, making it even more important that businesses carefully plan their liquidity and repayments.

Revenue-based financing as an alternative

Other types of financing—such as revenue-based financing—are becoming increasingly relevant in Germany as alternatives to traditional working capital loans. Stripe Capital provides businesses with capital based on their historical revenue. Then, businesses pay down their loans automatically as fixed percentages of their on-platform revenue. This means payments are lower during slower periods and vice versa.

This type of financing doesn’t require much collateral and avoids the lengthy review processes typical of traditional bank loans. This financing is especially well-suited for businesses with fluctuating or seasonal earnings, those wanting to expand, and those with short-term liquidity needs. Financing is tied to the business’s actual revenue, meaning it can develop with the business and be an effective stopgap for liquidity bottlenecks.

What situations are appropriate for working capital loans?

For businesses in Germany, working capital loans are most appropriate for the following situations:

• Offset seasonal fluctuations
  Businesses with earnings that significantly fluctuate—such as in tourism or retail—can use working capital loans to help them through periods of low earnings.
  
• Finance inventory
  Ecommerce and retail businesses must prepurchase products ahead of seasonal spikes. Working capital loans can allow them to replenish their stocks without tying up all of their equity.
  
• Make advance payments to suppliers
  Sometimes, businesses must make advance payments to ensure on-time deliveries or use volume discounts. Working capital loans can give them the funds to make these payments.
  
• Pay taxes or invoices
  In months where revenue is low, tax payables or regular invoices can strain liquidity. Working capital loans can help businesses make these payments on time.
  
• Finance urgent repairs
  Unforeseen repairs to important machinery or equipment can negatively impact operations. Working capital loans allow businesses to pay for necessary maintenance immediately and avoid interruptions to production.
  
• Manage gaps in liquidity
  When earnings are late or unforeseen expenses arise, working capital loans can ensure that businesses remain solvent in the short term.
  

Common misconceptions about working capital loans

Although working capital loans are well-established financing tools in Germany, there are some common misconceptions about them that can lead to misjudgments or unrealistic expectations. Below, we explain and clarify these misconceptions.

Same as overdrafts

Some business owners believe that a working capital loan automatically offers the same flexibility as an overdraft facility. This is only true if the bank provides a working capital loan specifically as an overdraft facility.

However, if the bank provides a working capital loan as a fixed-term loan, it is paid out as a single lump sum and repaid according to an agreed schedule. This makes the loan less flexible because businesses cannot make adjustments to how they use it. Therefore, business owners must decide whether they need lines of credit or fixed-term loans before applying.

Suitable for long-term investments

A widely held misconception is that working capital loans can also be used for purchases of machinery, real estate, or other long-term business assets. However, banks typically provide working capital loans to finance ongoing operational expenses and current assets. Depending on the intended acquisition, an investment or promotional loan could be a better option.

Quick approval

Another misconception is that working capital loans are always quick and easy to obtain. In reality, banks carefully assess each applicant’s financial situation and credit score. This process can take days or weeks, depending on the bank, documentation, and complexity.