Starting your own business is an exciting task. Many things have to be considered and set up – be it the production processes, the appropriate location or marketing. To build all the activities for the start-up, you will need money. That can quickly go beyond the scope of your own savings. Founders therefore need ways to finance their start-up without going into debt for decades.
As a start-up company, you need money even before you set up your company and for the first few months in order to:
Founders have to think about raising capital and securing start-up financing. Depending on the business concept, other means are suitable for financing these expenses.
The following options are available for solid start-up financing for a start-up.
Equity in the form of money or real estate is certainly a convenient method of financing a start-up. However, it must be noted that the equity must continue to cover the cost of living and other personal expenses and cannot be used exclusively to start up the company.
If a miscalculation occurs here and money runs out too quickly, founders lose their creditworthiness and thus the creditworthiness that they need to continue their start-up – for example to finance innovations.
Your own capital can be increased with the help of donors. Perhaps a family member is enthusiastic about the idea and would like to contribute some start-up capital. In most cases, relatives are not as specific about the accuracy of the repayment rates as the credit institution. The money borrowed from family or friends is invested in the start-up under the name of the founder and is therefore considered personal equity.
In this way, interest can also be avoided, because private contacts – especially the family – often forego interest on the loan. In order to get any potential conflict out of the way, it is best to define the framework conditions in writing.
They are also called start-up sponsors and support founders in several matters. They provide financial support and help build business. That said, business angels really are the founders’ angels as they bring in their capital and expertise, which is often priceless. In return for their commitment, they receive company shares and thus a certain right to participate in decision-making.
A loan from a bank is arguably the most common type of financing. If the banks are presented with a good business plan and sufficient equity is available, then founders can also get a loan from the bank. However, a risky venture may lead to a bank rejecting the loan.
Banks want credit security from founders in the event of default. This means that a loan must be secured – for example with a guarantee from a third party, life insurance or residual debt insurance.
A guarantee works through a third person – the guarantor. If the loan amount decreases over the years, then the guarantee obligation is also reduced. This surety is usually only called in when the founder, as the debtor, has pledged the entire assets.
Life insurance or term life insurance helps to protect loved ones financially in the event of their own death. In an emergency, however, it also covers the debt that founders owe to banks. Because in the event of death, the sum insured is paid out and, depending on the agreed amount, the insurance then also covers the loan.
The residual debt insurance also covers the death of the policyholder. The amount of the installments is tied to the loan – the smaller this is, the lower the contributions are usually. Often, the residual debt insurance is offered by the bank when taking out the loan and can thus be financed through the loan. So it increases the total amount and only applies to the loan.
More and more banks advertise that they do not require collateral from borrowers. However, this is preceded by a detailed check of the borrower’s creditworthiness, many founders fail this stress test.
Founders are also supported by funds from the federal government, the state or the European Union. There are various funding programs for this purpose that give budding entrepreneurs a financial support. They are characterized by long terms and low interest rates. The start-up period of the company is usually a grace-free phase. No debts have to be paid back during this period. In this way, initial loads can be cushioned well.
Founders receive the funding through regional institutions, their house bank or guarantee banks. Many funding programs can also be coupled with one another.
Private funding organizations are also there to provide founders with money and knowledge. Founders apply to the start-up centers or innovation centers and receive funding – with a good concept, a convincing business plan and positive feedback. Funding centers provide financial resources, share know-how, arrange contacts and help founders to find suitable premises.
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