Lending and KWG Licences: When a Bank Licence Is Needed.

Many successful entrepreneurs are repeatedly asked in the course of business to provide loans. Helping a long-standing business partner bridge an imminent liquidity shortfall with such a loan can feel, for some businesspeople, almost like a matter of honour. Loans with a profit participation component (partiarische Darlehen) can also offer interesting investment opportunities for the lender beyond the classic equity investment.

What is usually overlooked, however, is this: commercial lending is a banking business and, in principle, is only permitted with prior authorisation from BaFin (put simply: with a banking licence). The following article outlines the key points of the licensing requirement for lending.

Not every individual loan or shareholder loan triggers an authorisation requirement. The issue becomes critical above all where loans are granted with a profit motive and an intention to repeat the activity, or where the structure economically resembles a separate lending business.

The licensing requirement

Lending requires authorisation where an undertaking carries on lending business in Germany on a commercial basis. The statute defines it as follows:

Anyone wishing to conduct banking business or provide financial services in Germany on a commercial basis or on a scale requiring a commercially organised business undertaking requires written authorisation from the supervisory authority; […].

Banking business includes […] 2. the granting of money loans and acceptance credits (lending business), […].

A banking licence is therefore required for lending where two conditions are met: lending business is carried on in Germany, specifically by the granting of money loans (§ 1 para. 1 sentence 2 no. 2 KWG); and this is done on a commercial basis or on a scale requiring a commercially organised business undertaking (in other words, not merely as an isolated exception).

As to (1): money loans are, in principle, all loans within the meaning of § 488 BGB and comparable contracts under foreign law under which repayable money is advanced – regardless of whether interest is charged and regardless of the amount of that interest, and regardless of whether security is taken. In principle, this also covers certain mezzanine financing instruments such as profit-participating loans.

Deferred payment claims, by contrast, do not become a “money loan” within the meaning of the Banking Act merely because payment has been deferred.

As to (2): lending business is carried on on a commercial basis if it is pursued with an intention to make a profit and is designed to continue for a certain period.

In principle, it does not matter what proportion of the undertaking’s overall business is made up by lending business. “Carrying on” lending business may therefore exist even where almost all other transactions are non-banking transactions. The intention to make a profit is already present where loan interest is charged, even if that interest is so low that it does not even cover the costs associated with granting the loan.

As regards continuity, it is sufficient that, at the time one loan transaction is carried out, there is an objectively recognisable intention to repeat the same or a similar transaction in the future. So if several loan agreements have already been entered into, the resulting presumption of continuity can only be rebutted if, in relation to each individual loan, it can be shown that it was a special case driven by the particular situation. A close temporal connection between the individual loans is not required.

Example: A mid-sized company grants a long-standing supplier a single interest-bearing loan of EUR 150,000 to bridge a supply bottleneck – a situation-specific one-off that, on its own, does not trigger a licence requirement. If the same company instead makes five interest-bearing loans to various business partners over two years, the repetition points to a sustained, commercial activity – and therefore to a licence requirement, even if lending accounts for only a small part of its turnover. Interest alone is enough to establish a profit motive; its level is irrelevant.

As an alternative to a commercial basis, the licensing requirement is also triggered where lending business is conducted on a scale typical of a commercial undertaking. Compared with the commercial-basis test, this alternative has less practical significance, because the element of commerciality will almost always already be met before lending reaches such a scale (exception: interest-free loans, where there is no profit motive).

Boiled down to one sentence: anyone granting loans outside special exceptional situations should expect to fall within the authorisation requirement under the German Banking Act.

What happens if unauthorised lending business is discovered? Conducting banking business without authorisation is a criminal offence punishable by up to five years’ imprisonment or a fine (§ 54 KWG).

What should you do?

Actually applying for a banking licence will, in most of the cases considered here, be neither realistic nor sensible because of the high requirements and the resulting submission to banking supervision. The licensing requirement should, however, be analysed carefully in the individual case. It may be possible to identify a special exceptional situation that takes the loan outside the licensing regime, or there may be structuring options that remove the case from the scope of the rules.

In any event, that analysis should be carried out before the loan is granted, because the criminal offence may already be complete upon entering into even a preliminary loan agreement.

There are several noteworthy exceptions to the licensing requirement that can be used in structuring practice:

One of the most practically relevant is the so-called group privilege (Konzernprivileg) under § 2 para. 1 no. 7 KWG. It applies, however, only if banking business is conducted exclusively with parent companies, subsidiaries or sister companies. Mere membership in a wider group of affiliated companies is not enough; group structures based on common control without a parent-subsidiary relationship and hybrid models involving third-party business do not automatically fall within the privilege.

Further practically important categories concern typical shareholder loans as well as corporate loans with a qualified subordination clause. Neither is a blanket exception. What matters are the specific shareholder position and the structure of the company; in the case of subordination, in particular, there must be a civil-law effective qualified subordination agreement that prevents enforcement before insolvency. Conversely, qualified subordination also appears in convertible loans – there, however, mainly to avoid deposit business under the KWG on the side of the borrowing startup (see the article on convertible loans in venture capital).

Anyone who wants clarity in doubtful cases can submit the facts to BaFin for assessment. In some cases, an exemption from the licensing requirement may also be available. Another structuring option is the involvement of an authorised credit institution as a so-called fronting bank: the credit institution enters into the loan agreement with the borrower and subsequently assigns the rights and obligations to the funder. In legal terms, the funder is then not regarded as itself “granting” the loan. But that is safe only if the structure works in detail – in particular, later extensions or new credit decisions may again trigger the licensing requirement.

Private business law repeatedly encounters situations in which public-law requirements limit private autonomy. The example above from banking regulatory law is one of them, just as competition law and capital markets law provide others. The sanctions for ignoring those requirements are usually severe.