Bank loans in Germany: the Hausbank, overdraft versus investment loans, collateral and rating

What you will learn

• What the Hausbank relationship means and which documents the bank expects.
• The difference between a Kontokorrentkredit (overdraft line) and an Investitionskredit, and the rule of matching maturities.
• Annuity loans versus straight-line loans, calculated step by step.
• The collateral German banks accept and the ratios that drive your rating, above all debt-service capacity.

Explanation

The Hausbank

Most German small businesses have one main bank, the Hausbank, usually a Sparkasse, a Volksbank or a commercial bank. It runs the business account, grants the overdraft and, as lesson 4 shows, is the only route to KfW loans. Expect to deliver: the last two annual statements (Jahresabschluss) or income-surplus statements, the current BWA (betriebswirtschaftliche Auswertung, the monthly management report from your bookkeeping), a business plan with Kapitalbedarfsplan and liquidity plan, the owner's private tax assessments, and a list of existing loans and leases.

Overdraft versus investment loan

A Kontokorrentkredit is an agreed overdraft limit on the business account. It is flexible and interest is charged daily on the amount used, but the rate is high (often around 10 percent per year or more, higher still above the limit), and the bank can reduce or cancel it at short notice. It is the right tool for swings of a few weeks.

An Investitionskredit is a term loan for a specific asset: fixed amount, fixed term, usually a fixed rate, repaid by instalments. Two repayment forms exist:

• Annuitätendarlehen (annuity loan): equal payments; the interest share falls and the repayment share rises over time.
• Ratendarlehen (straight-line loan): equal repayment amounts plus interest on the falling balance, so payments start high and fall.

The annuity formula: A = P × i ÷ (1 − (1 + i)^−n), where P is the principal, i the rate per period and n the number of periods.

The key rule is Fristenkongruenz (matching maturities, sometimes called the golden balance-sheet rule): finance an asset that serves you for five years with money that you repay over about five years. Buying a van on the overdraft breaks this rule: the rate is high and the bank can call the money back while the van is still needed.

Collateral

Banks lend against Sicherheiten: a Grundschuld (land charge), Sicherungsübereignung (ownership of machines or vehicles transferred as security while you keep using them), Globalzession (assignment of all receivables), pledged deposits and, for a GmbH or UG, almost always the owner's personal guarantee (Bürgschaft). Banks value collateral far below market price; ask for the bank's Beleihungswert (lending value) rather than assuming.

How the bank reads your numbers

Every bank runs a rating that combines hard numbers with soft factors. The hard numbers that matter most for a small firm:

• Equity ratio (Eigenkapitalquote) = equity ÷ total assets. Low or negative equity is the most common reason for a refusal.
• Debt-service capacity (Kapitaldienstfähigkeit) = cash flow available for debt service ÷ annual debt service (interest + repayment of all loans and leases). Banks want this comfortably above 1.0; many look for about 1.2 or more after the owner's living costs.
• Account behaviour: returned direct debits, breaches of the overdraft limit and late BWA deliveries lower the score more than owners expect.
• External data: SCHUFA for the owner and agencies such as Creditreform for the company.

Worked example

Hypothetical example: a joinery buys a CNC machine for €50,000 and compares two five-year loans at a fixed 6 percent per year with annual payments. Fees, insurance and taxes are excluded.

Annuity loan

A = €50,000 × 0.06 ÷ (1 − 1.06^−5) = €50,000 × 0.06 ÷ 0.25274 = €11,869.82 per year.

Total paid: 5 × €11,869.82 = €59,349.10; total interest €9,349.10.

Straight-line loan

Repayment €10,000 per year. Interest: €3,000, €2,400, €1,800, €1,200, €600, total €9,000. Payments fall from €13,000 to €10,600; €349 cheaper in total but €1,130 heavier in year 1, when a new machine earns least.

Debt-service capacity

The joinery expects €20,000 of cash flow available for debt service after the owner's living costs. Year-1 ratio: annuity €20,000 ÷ €11,869.82 = 1.68; straight-line €20,000 ÷ €13,000 = 1.54. Both are above 1.2, so the bank is likely to accept; the annuity leaves more room in year 1.

Common mistake

Practice activity

On paper: a café borrows €30,000 for three years at a fixed 5 percent as an annuity loan with annual payments. Cash flow available for debt service is €14,000 per year. Calculate the annual payment, the interest and repayment split of year 1, the total interest over three years and the year-1 debt-service capacity ratio. Would a bank that wants at least 1.2 accept?

Key takeaways

• The Hausbank decides on documents: annual statements, BWA, plan, private tax data and a clean account history.
• Use the overdraft for short swings and term loans for assets; match the loan term to the asset life.
• An annuity loan has equal payments and slightly more total interest than a straight-line loan, but a lighter first year.
• Debt-service capacity (cash flow ÷ debt service) and the equity ratio are the two numbers that decide most small-business loans.

Next step

The next lesson shows how the same Hausbank can route you to KfW loans, guarantee banks and start-up grants that reduce the bank's risk and your rate.