Financing Models

The purpose of financial planning is for you to establish your capital requirements. Here, you have two questions to consider: how does financing work in general, and where does the money come from? The possible answers to these can vary considerably: Capital comes out of your own pocket, from initial sales or loan capital in the form of bank or promotional loans. In certain cases, you can even opt for venture capital, state-run grant programmes or even a crowd-funding campaign. Generally speaking, it makes sense to have a combination of different financing types.

If you have savings that you use while starting up your business, these take on an essential role as equity in your company. On the one hand, you are in a flexible position with sufficient equity, making you ideally equipped for dealing with liquidity shortfalls and allowing you, for example, to offset unforeseen fluctuations, pre-finance orders and respond to changing market requirements. On the other hand, equity puts you in a better negotiating position with banks and savings banks (Sparkassen) whilst also improving your rating, which can result in lower interest rates. Generally speaking, you should be able to cover 15 to 20 per cent of your capital requirements with equity.

Bootstrapping is the ideal type of financing for you if you can accommodate your company set-up and strategy within a very tight budget and with minimal resources. By avoiding expenditures whilst at the same time increasing revenues, bootstrapping manages to keep your company afloat with its cash flow only. Bootstrapping is primarily advisable for setting up a company that only requires a little starting capital – also known as a low-budget model.

As in-house funds are rarely sufficient and equity financing is not suitable for every venture, you may need to top up the capital requirements with credit from the bank (also called loans). Depending on what it is that needs to be financed, regular banks and savings banks offer various different lines of credit. Investment loans can be used to finance fixed assets for new, alternative or expansion investments and are guaranteed for the medium to long term. With capital loans, you can cover short-term financing requirements such as personnel costs or marketing expenses, and also pre-finance orders. In addition to demonstrating a promising concept, another decisive factor for banks and savings banks when it comes to granting credit is their ability to remain protected. To this end, they generally request standard bank collateral that they can fall back on in the event of a credit default. Examples of collateral include mortgages, chattel mortgages on machines and vehicles, or fixed deposits. If you do not have enough collateral available (to cover the amount of the loan), you can ask the Bürgschaftsbank Berlin to act as a
guarantor.

Public funding options can also be included in the funding mix required to set up your company. Generally speaking, this is a grant for individuals in the form of loans with special conditions, guarantees or also subsidies. As far as these are concerned, it is always important to submit your application before starting your venture. It is only once you have submitted your application that financial and contractual obligations with regard to ordering goods and signing contracts or similar are covered and the business activities are registered. Please be aware that there are no legal claims to be made with regard to granting public funding.

Promotional loans are the most common form of public funding for start-ups. For companies based in Berlin, both the Investitionsbank Berlin (IBB) and the KfW Bankengruppe offer various different types of credit. They usually offer favourable interest rates, lower capital requirements, long maturities, and a repayment-free start-up period for the first few months. Promotional loans are typically requested via regular banks and savings banks (commercial banks), with whom you can also set up your business account – also known as the ‘house bank’ principle. It is only when the commercial bank is satisfied with the details of your venture but does not want to make you an offer without funding that it forwards the funding application to the promotional bank. This institution also checks the application and offers up the money if a positive decision is made. An exception to this can be found in the IBB’s micro-credit, which is offered for minor capital requirements of no more than 25,000 EUR (50,000 EUR for innovative companies), and can be requested directly from the IBB for a more direct route rather than having to go via a commercial bank. The funding is issued based on its intended purpose, which means the relevant proof (in the form of receipts, etc.) of the investment provided must be submitted to the bank retrospectively.

Crowdfunding is a way of raising finance from an interested online community in order to fund all sorts of projects.

There are four types of crowdfunding:

Equity fundingcovers all financing transactions in which a business receives additional capital from new or existing owners, representing external financing of firms with equity. Various types of equity finance are possible depending on the investment phase and project as well as the company’s profile. The terms and the exact form of equity financing are contractually agreed on an individual basis.

Private equity is an appropriate financing option for technology-oriented or innovative, fast-growing start-ups. In such cases, the risk of default is often either difficult to estimate or else clearly going to be high, with a particularly long time required to get to market. As a result, credit financing from financial institutions often fails to meet the risk management requirements. Private equity increases the equity of a company
through external financing, provided by business angels, venture capital, private equity, or accelerators/incubators.

Equity financing in the early/growth stages of innovative start-ups is frequently referred to as venture capital. Various equity options can come into play here depending on the investment phase and venture, not to mention the company profile. The terms and conditions of the investment form are determined by contract on an individual basis.