This information is taken from “GründerZeiten 06 Existenzgründungsfinanzierung” from Bundesministerium für Wirtschaft und Energie www.bmwi.de
Sources for the Initial Capital¶
He who sets up a business and wants to see it grow and secure it during the initial steps needs sufficient initial capital.
To get that capital means to calculate precisely how much are the capital requirements. That concerns not only the investors.
Under no circumstances should we forget the costs of living. Experience shows that the fall in income after the start is rather important.
How the required capital is calculated is described in page 7 “Businessplan”.
The first and best source to get the required money to get up and running is your own money. The amount of equity should be no less than 20%. Because if you want to borrow the remaining part of the initial capital, this can be seen as a signal that you are also taking risks for your own enterprise and not only from the loan.
Normally your own money is not enough to start. This means you have to take outside money, this means a credit, taken from the bank of your choosing,
need help here
Die erhält man von der Bank, die man sich aussucht, um mit ihr im weiteren Geschäftsleben zusammenzuarbeiten (Hausbank).
Loans can be found for the current interest rates.
Founders and young entrepreneurs don’t get at their banks the same favorable credit conditions as big companies. The federal government and state governments offer special funding in order to provide access to capital to “small” and “unknown” companies.
the previous part may be wrong:
Bund und Bundesländer bieten daher besondere Förderprogramme an, um ggf. Nach teile auszugleichen und den „Kleinen“ und „Unbekannten“ den Zugang zum Kapitalmarkt zu erleichtern.
Banks oftentimes refuse credits because the desired collateral is not available. Specially when the own share is too low,
können Teilhaber für zusätzliches Eigenkapital sorgen.
When you know how much initial capital you need, you need to take care of the financing. The first and best source this for purpose is your own money. For those who want to increase the equity, there are many alternative equity sources.
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- Relatives and Friends
- For small sums
- Partners and Shareholders
- Stakeholders can provide capital. However the may want to have a say in the company.
- Subordinated loans
- The program “ERP capital for establishing” is intended for founders, helping them to “stick to its own resources”.
- Investment companies
- Instead of a partner you can search through a stake in a publicly funded or a private equity firm.
Effects of Equity¶
Apart from the fact that banks and financial institutions expect a certain amount of equity for most loans, available own money is an important “survival elixir” for every company.
Equity gives Security¶
The more equity, the better: It reduces the risk of liquidity problems, which even in small deviations from the plan can occur (eg., by pre-financing of orders, lower sales at launch, expenses for research and development projects, etc.)
Equity makes you independent¶
Only someone who has enough equity, can react quickly and flexibly to new financing needs (eg. As investment at market change).
Equity improves Rating¶
Those who risk their own funds, can generally expect that he/she can convince others of his intention and get lending more easily.
In addition, the proportion of own funds is used by the banks as an important criterion in the evaluation of creditworthiness in the rating process, the higher the credit rating, the lower the interest rates charged for loans.
Capital and Know-How¶
Equity can also flow through business partners into the company. Moreover, such partners often bring also additional expertise and active support to the company.
Finance knowledge: equity
Founders and entrepreneurs that need more capital than they have usually borrow money. For this purpose banks and Sparkassen give loans. These loans fall into three categories according to the duration: short-, medium- and long-term.
Short-term Loans (up to 12 months)¶
Overdraft. This is a loan for your company bank account, where all current payments are settled. An overdraft loan serves as a short-term loan: for example, to pay a pending invoice on time. Overdraft loans are not big investments like machinery that stays among company assets for a long time. Agree on sufficient credit line for the overdraft loans with your home bank. The rule of thumb: a one-month turnover. Attention: if you overdraw your credit line, fallen die Zinsen oft „saftig“ aus
Medium/Long-term Loans (for more than 12 months)¶
Investment loan. The investment loan serves for funding properties, buildings, machinery, fleet etc. (=fixed assets). The term of the loan depends on the loan sum and interest rate that you want or can pay. Even in the starting phase it can be sensible to stretch the repayment of the loan for longest possible term. This way the interest rates are lower and it improves the ability to pay of the young business.
But one should keep in mind that long term credits are overall more expensive because during a longer term one pays more interest.
Search of Home Bank¶
The ones who don’t have a home bank: take your time to find a bank. Check the services and conditions of different hauses. Negotiate about loan conditions early. Discus with the deciding contacts: branch directors and managers of special credit departments are not only for big clients.
Securities and Guarantees¶
Banks give loans only when they are sure that they receive the borrowed money back. The borrower can provide this certainty himself. As securities one can use:
- The success of the business idea
- Own capital
- Rateable/countable securities
If the borrower cannot offer securities (or few securities), the private (rarely) or public guaranties of guarantee banks may help.
Money vs Trust: Rating¶
Founders or entrepreneurs who want to receive a loan must allow to rate themselves. The rating is an assessment of expected economic abilities of the borrower, his ability to pay on time. For this the bank evaluates the overall situation of the concerned business. The result is a report about his credit-worthiness. Depending on how high the risk of the bank is, the bank sets the loan conditions and interest rates.