Definition and Legal Classification of Financing
Financing is a central concept in commercial and contract law, describing all measures aimed at procuring capital for individuals, companies, or public institutions. The goal of financing is to provide the financial resources needed to carry out a project or to maintain a business operation. The regulations governing financing are determined by national and international legal standards and affect various areas of law, including civil law, commercial law, capital markets law, and tax law.
Types of Financing in the Legal Context
1. Equity Financing
Equity financing involves the procurement of capital by the owner or owners of the company. The legal aspects of particular relevance here are capital procurement and capital maintenance, as regulated for the respective company forms by the Commercial Code (HGB) or Stock Corporation Act (AktG).
a) Corporate Law Fundamentals
In corporate law, equity financing typically occurs through contributions made during the formation of a company (e.g., GmbH, AG) or through capital increases. Statutory requirements for capital procurement (minimum share capital, contributions in kind and in cash) ensure that certain protective mechanisms benefit creditors and shareholders.
b) Profit Retention
A special form of equity financing is profit retention. Here, earned profits remain within the company, which has legal implications for profit distribution and dividend policy. The preservation requirements of each company type require proper documentation and use of the retained profits.
2. Debt Financing
Debt financing is provided by third parties, particularly credit institutions or via the issuance of bonds. The legal structure is governed by the law of obligations, specifically Sections 488 et seq. BGB for loans, as well as special statutory regulations such as the German Banking Act (KWG), the Securities Trading Act (WpHG), and other relevant laws.
a) Loan Agreements
The loan agreement is the central legal instrument for debt financing. The German Civil Code (BGB) governs the obligations and rights of the contracting parties, particularly regarding interest, repayment, and collateral. Additionally, consumer protection provisions, such as those implemented in the EU Consumer Credit Directive, apply.
b) Security Law
In connection with debt financing, collateral plays a particularly important legal role. This includes guarantees, land charges, mortgages, transfer of title by way of security, and assignment of claims (cession). The relevant provisions are found in the BGB and HGB (Sections 364 et seq. BGB for guarantees, Sections 1113 et seq. BGB for security interests on real property).
c) Capital Market-Based Financing
Capital market financing involves raising funds through the issuance of securities, especially shares and bonds. These processes are regulated by capital markets laws, such as the Securities Prospectus Act, the Securities Trading Act, and the relevant regulations of the European Union. Legal requirements address disclosure obligations, prospectus requirements, and transparency obligations.
3. Alternative Financing Methods
In addition to conventional equity and debt financing, innovative forms such as leasing, factoring, crowdfunding, and mezzanine capital exist. The legal framework for these forms is set by various statutory and contractual regulations.
a) Leasing
Leasing contracts generally fall under the rental law provisions of the BGB but can contain technically complex special regulations. The distinction between finance leasing and operating leasing is particularly noteworthy under tax and accounting law considerations.
b) Factoring
Factoring refers to the ongoing sale of receivables to a third party (factor). The legal basis lies in general contract law, supplemented by specific requirements for transfer of receivables and data protection under the GDPR and BDSG.
c) Mezzanine Financing
This hybrid of equity and debt capital, usually in the form of subordinated loans or profit-sharing rights, must be assessed independently in legal terms. Subordinated loans are subject to the provisions of the BGB, whereas profit participation rights are governed particularly by corporate and tax law aspects.
Contractual Particularities in Financing
Contract Drafting and Clause Control
The drafting of financing agreements requires the consideration of numerous general provisions of the BGB as well as special regulations (e.g., review of standard business terms under Sections 305 et seq. BGB, transparency requirement). In consumer credit law, formal requirements and mandatory information obligations must be strictly observed.
Liability Issues and Risks
Liability in financing transactions can be structured in various ways. In cases of misconduct, such as incorrect advice or breaches of duty in connection with the provision of funds, claims for damages may arise. The legal basis for liability is provided by the German Civil Code (contract and tort law) as well as the Securities Trading Act (advisory and prospectus liability).
Financing and Insolvency Law
Creditor Protection and Priority Ranking
In the event of insolvency, the rights of equity and debt financiers are treated differently. The Insolvency Code (InsO) regulates the priority ranking of creditors, the debtor’s obligations, and creditors’ rights to access the debtor’s assets.
Special Security Instruments
Legally relevant security instruments, such as rights to separate satisfaction and rights of segregation, determine if and how certain creditors receive preferential treatment in insolvency proceedings. The legal basis for these rights is found in Sections 47, 49 et seq. InsO.
Financing Law in the International Context
In international business, financing is shaped by cross-border legal acts, European regulations (e.g., MiFID II, Prospectus Regulation), and international contract standards (e.g., LMA standard agreements). Conflicts regarding applicable law and jurisdiction are resolved by conflict of laws provisions such as the Rome I Regulation.
Tax Law Aspects of Financing
Financing transactions regularly trigger tax obligations. Particular attention must be paid to the regulations regarding income and corporate tax, transfer pricing for intra-group financing, and the deductibility of interest expenses (Section 8a KStG, interest barrier). Special VAT regulations particularly affect factoring and certain types of finance leasing.
Summary
Financing constitutes a legally complex and dynamic area that interlinks numerous branches of law. From capital market-regulated debt financing to equity financing shaped by corporate law, and including alternative forms of financing, a wide range of national and international legal provisions must be observed. The legally secure structuring and execution of all financing transactions require in-depth expertise in civil law, corporate law, insolvency law, tax law, and capital markets law in order to comprehensively safeguard the rights and obligations of all parties involved.
Frequently Asked Questions
What legal requirements must be met for a financing agreement?
A financing agreement, for example a loan or credit agreement, generally does not require a specific form under Section 488 BGB unless it involves consumer loans or particular statutory regulations apply (e.g., for real estate loans Section 492 BGB, written form requirement). Essential conditions are the legal capacity of the parties, the ability to determine the subject matter of the contract (i.e., the sum to be financed), and agreement on the essential contractual terms (e.g., repayment modalities, interest, term). Certain information obligations must also be complied with—particularly for consumer lending under Sections 491 et seq. BGB—such as providing a contract document, transparent disclosure of all costs (effective interest rate, repayment plan), and clear information on the right of withdrawal. When real estate is used as collateral, notarization may also be required (especially when creating land charges). Failure to comply with these legal requirements may result in rights of voidance, challenge, or rescission.
To what extent does the financing of companies fall under specific regulatory requirements?
Corporate financing, especially via credit institutions, is subject to banking supervision under the German Banking Act (KWG). This means that both lending and refinancing are subject to certain liquidity, capital, and risk regulations (Basel III and CRR/CRD IV). For certain types of financing, such as leasing, factoring, or mezzanine capital, regulatory classification under the KWG, ZAG (Payment Services Supervision Act), or VermAnlG (Investment Act) must also be reviewed. Financial institutions are often required to submit notifications or obtain authorizations from BaFin (Federal Financial Supervisory Authority). There are also obligations regarding anti-money laundering, which must be observed within the framework of Know Your Customer (KYC) processes and the identification of beneficial owners.
What statutory information obligations exist in financing vis-à-vis the consumer?
In consumer credit law (Sections 491 et seq. BGB as well as the Price Indication Ordinance—PAngV), there are extensive information obligations. Lenders must provide consumers with standardized information before concluding the contract (the so-called ESIS—European Standardized Information Sheet), which explains pricing information, interest rates, possible additional costs, repayment and collateral arrangements, as well as the right of withdrawal in a comprehensible way. Upon conclusion of the contract, a written contract document must also be provided. If these information obligations are violated, this can lead to extended withdrawal periods or the invalidity of individual contractual clauses. Furthermore, in certain cases, such as associated contracts (credit for financing goods or services), additional legal protective provisions in favor of the consumer must be observed.
What role does collateral play in the legal context of financing?
Collateral serves to protect lenders against the risk of default. Legally, this means that possible forms of collateral (e.g., guarantees, mortgages, transfer of title by way of security, assignments) must be expressly agreed in the financing contract. For real estate financing, the establishment of a land charge, which must be notarized and then entered into the land register, is typically required. Guarantees often require written form (Section 766 BGB), and special consumer protection provisions apply if private individuals act as guarantors. Defective or invalid collateral may render the entire loan security and thus the right of recourse ineffective.
To what extent is the right of withdrawal legally regulated in financing?
The right of withdrawal in financing law is particularly relevant in the context of consumer loans under Section 355 BGB, Sections 491 et seq. BGB, and for distance contracts (Section 312g BGB). Consumers are granted a statutory right of withdrawal lasting 14 days, which is triggered by proper withdrawal information. For real estate loans, the period is also generally 14 days. If the withdrawal information is missing or incorrect, the right of withdrawal is significantly extended, in practice even indefinitely. For associated contracts, such as car loans, withdrawing the credit may result in the reversal of the financed purchase.
What legal limits are there in the structuring of financing interest rates?
The amount of interest agreed in a financing contract is subject to certain restrictions. Under Section 138 BGB, a loan is deemed immoral if the annual effective interest rate is conspicuously disproportionate to the standard market rate (the usury threshold is currently around double to triple the market rate, but at least 12 percentage points above market). There is also a duty to transparently disclose all cost items (effective interest rate, processing fees, additional costs). Invalid or non-transparent interest rate clauses may result in the reimbursement of overpaid interest. In addition, credit institutions are subject to regulatory requirements to disclose all fee structures (Price Indication Ordinance).
What obligations does the lender have regarding creditworthiness assessments?
According to Section 505a BGB (implementing the European Consumer Credit Directive), lenders are legally obligated to assess the creditworthiness of consumers before granting loans. The creditworthiness assessment must be understandable and documented, taking into account all relevant income, asset, and liability information of the applicant. If the credit assessment is positive, the contract may be concluded; if the prognosis is negative, granting the loan is prohibited. If loans are issued without adequate assessment, the lender may be liable for damages caused by over-indebtedness. For corporate clients, there are similar but less extensive statutory requirements; however, there are regulatory minimum standards for risk management (MaRisk).
