Many founders are at the very beginning of their career. Certainly, there are already successful founders who have the necessary capital, but the majority have to look for ways to finance their start-up and the initial period. It is therefore often not easy to get a loan. The self-employed are rarely among a bank's favourite customers. But how is it possible to obtain an entrepreneurial loan in the start-up phase?
Figure 1: Start-ups in Germany rely on various sources of financing. Often, the focus is on own funds. But what if an additional injection of funds becomes necessary? Image source: @ Smava.de
The situation of founders at a glance
Many founders find themselves in the position of not yet having a sufficient financial cushion. There may be savings, but in many cases these are already invested in one's own business idea. The bottom line, however, is that there is often little to no equity left.
For banks, this means:
1. hardly any resilient income
The founder's income is not certain. There is a difference for founders in sideline business, as they can show the income from the main job. Income from pure self-employment is always viewed with a certain amount of doubt by banks, because it is by no means guaranteed. Turnover is subject to fluctuations and cannot be calculated with any certainty, especially at the beginning. In addition, there is only a rare and short-term entitlement to unemployment benefits. If the start-up goes wrong, founders would have to resort to Hartz 4 and would no longer be able to meet their financial obligations.
2. hardly any collateral
They are also rare in most cases. Of course, there are founders who already own a paid-off home or even valuable works of art, but this is rather rare. Normally, no collateral can be deposited for the business loan.
In fact, it is often difficult to convince a bank as a founder. For this reason, traditional business loans are not at the top of the financing options for start-ups.
In many cases, founders are also standing on their own two feet, because exaggerated expectations and calculations are a stumbling block in the end. But all this knowledge does not help the founder, because in his situation he needs an entrepreneurial loan for:
- Construction - whether office space, storage space or even production halls or laboratories need to be created or expanded is irrelevant. The money for it is necessary.
- Equipment - of course, this varies depending on the business founded. But certain facilities or equipment are needed by almost every newly founded start-up.
- Legal costs - these should not be underestimated either. A founder is well advised to have specialist lawyers at his side. Hardly any founder is able to submit a patent application correctly and comprehensively on his own.
Hint: If a patent has already been successfully applied for, this can have a positive effect on borrowing. The reason is quite simple: the invented product can no longer be brought to market by outside companies without further ado - so the sales opportunities and thus the income increase.
What requirements do founders have to fulfil for bank loans?
Every business founder should prepare perfectly for the loan application. This means not only knowing about the possible subsidies, but also being able to present himself and his business in the best light. But what is involved?
- Business plan - very few banks can assess a founded company, its products and opportunities. An excellent - and professional - business plan is therefore the first foundation. With the help of the plan, borrowers can show the business opportunities and explain exactly how they want to achieve a specific goal. An essential part of the business plan is also a liquidity plan derived from it, in which the repayment of the bank loan is shown. Without the business plan, there is at most a chance of getting a small loan if the business is set up in the living room at home and there are hardly any other start-up costs.
- Guarantor/second borrower - it is also possible to use a guarantor for the entrepreneurial loan. However, the guarantor must again meet the bank's requirements and all sides must be aware that the guarantor is liable for the loan if the business goes under. The same applies to a second borrower, whose liability sometimes goes even further.
- Equity capital - the more equity capital there is, the better the chances of a loan being granted. Equity capital does not mean that the founders have to have saved the money themselves. Financial injections from family and friends can also count as equity. The same applies to land, provided it is unencumbered. In principle, it is advisable to have at least 10-15% of the required sum as equity capital for a business loan.
In fact, founders often have better chances if they still have a salaried job. This serves as security vis-à-vis the bank. It is only important to clarify exactly what the bank's expectations are regarding the employment relationship. Certainly, many founders use a salaried employment relationship to get the sideline start-up off to a good and safe start, but plan to work completely in their own company on day X. It is conceivable that the bank will not accept a salaried employment relationship. It is conceivable that the lending bank will prescribe the employment relationship for a certain period of time.
How else can founders raise capital?
Many founders face a huge dilemma. They have a grandiose idea that they are really convinced will succeed. But to implement this idea on a larger scale, they need money - and they don't get it because they can't offer any financial security. There is a good reason why many founders of new businesses go on special TV shows or look for investors in other ways. But if conventional loans are difficult or impossible to obtain, it is important to look around for alternatives. In principle, there are options for obtaining the required capital:
- Funding products - at the regional level, there are often special funding products that are intended for start-ups from the region. Depending on where you live, there are entire funding circles that sometimes prove useful. If they cannot provide the funds, they at least try to bring promising founders together with financially strong partners. At the EU level, too, there are some funding schemes that at least
- KfW funding - via KfW, founders can receive the "Startgeld" and another start-up loan. While the start-up capital loan is intended to strengthen a company's equity capital, the StartGeld is actually intended for start-up, running costs and investments. The StartGeld is issued with up to 125,000 euros, the Kapitalkredit with up to 500,000 euros. The advantage of these promotional loans is that KfW assumes the full or at least partial credit risk and sets the repayment rates extremely low. In addition, depending on the promotional programme, repayment-free years can initially be planned, during which only interest is due. This gives the young company some time to successfully place the investment. In addition, it is also possible to take advantage of the loans if the start-up was some time ago. The StartGeld can be applied for up to five years after the company was founded.
- KfW: SME promotional loan - this is aimed at small and medium-sized enterprises that are also newly started. Freelancers can also apply for the loan. The amount is in the millions. This loan is more of interest to founders who have already mastered the first step and now want to expand.
- Private loans - they are a good option if there are financially strong people in the family or among acquaintances. With a private loan, however, a genuine loan agreement is always necessary, which clarifies the sum, repayment arrangements, deadlines and interest. Unfortunately, the adage that friendship ends when it comes to money holds true, and without a written form, either side can claim that the loan was lower or higher, that a different interest rate was agreed upon, etc.. In principle, by the way, a financing community does not stand in the way of a private loan. The circle of friends and family can therefore also seek private funding. Here, too, the following applies: Each participant must include the conditions in writing in the contract. In private it can look like this: Grandma 5,000 euros, Dad 1,000 euros, brother 10,000 euros, etc. Everyone must then agree on the interest and instalments together.
- Crowdfunding - this method is also quite common, whereby there are clearly two options. The first, true crowdfunding, consists of private individuals as backers who can participate in the project with a sum of money. As a rule, this works well if the company is going to sell innovative products - the backers usually do not get money back, but the product. The other alternative is more special, because here some real investors invest - even with large sums. Certainly, a lot can be arranged, but usually the investors expect a share of the profits for their outlay. At the same time, they take over a certain part of the company. Only the search via special platforms differs from the 'real' investors. The second form is also called crowdinvesting.
- Investors - in advance: No investor gives money for the good cause, because of course they want to earn money from the company. Thus, a business plan is again the measure of all things. Beyond that, however, the chemistry must also be right. Especially at the beginning, so-called "business angels" like to get involved. But in addition to a pure capital injection, they also want to support with their know-how. For this reason, it is all the more important that there are not too many human differences.
Most start-ups are probably finalised with a mix of different financing sources. Even the equity capital is often made up of various funds, the other funds come from funding programmes, the family or investors. It is important to have a good business plan for all sides. This is the only way that the pitch will normally be successful. Here is an example: If you want to found a special software company that offers a special solution for hacking attacks, you should be able to present this solution in a few sentences in a clearly understandable way.
Figure 2: Many paths lead to the desired financial injection. Founders should carefully examine all options and make an informed decision at the end. Image source: @ Ibrahim Boran / Unsplash.com
Conclusion - several paths lead to the money pot
Founders certainly don't have it easy. A good idea alone does not bring in revenue, because there is no profit potential until it is implemented. But banks usually expect exactly that beforehand: financial collateral. This is what makes it so difficult to obtain appropriate sources of finance. Nevertheless, there are certainly ways and means of obtaining appropriate entrepreneurial loans. The start-up loans from KfW or the start-up assistance from the cities and states can be particularly helpful. If you also generate funds with your family, friends and perhaps through crowdfunding, you have a good chance of actually raising the necessary capital.