Financing options for start-ups and SMEs

Equity is the classic financing option for start-ups. With equity financing, an investor (as a shareholder or partner) provides the company with capital. In return, the investor receives shares in the company and thus becomes a co-owner.

As a co-owner, the investor has information rights relating to the general development of the business. However, business secrets do not have to be disclosed to him. In addition, each co-owner has co-determination rights, which are set out in the articles of association.

As with a normal share investment, the investor benefits in two ways, firstly through possible dividend distributions and secondly through an increase in the value of equity. The former leads to a direct inflow of liquidity to the investor.

The latter leads to an increase in the value of the shareholding. If the investor were to sell his investment one day, he would make a profit compared to the purchase price.

Equity investors are liable up to the maximum amount of their invested equity. In addition, equity investors must bear in mind that in the event of the company's bankruptcy, they only receive the capital that remains after all other creditors have been satisfied. In practice, this often means that equity investors in young companies suffer a total loss in the event of bankruptcy.

Sources of capital for young companies are the so-called 3Fs: Friends, Family and Fools.

Family and friends are often the first sources of financing for young companies. As they know the founder(s), they have the advantage of being able to better assess the management's potential.

Fools" refers to enthusiastic wealthy individuals. They are not family or friends, but believe in the business idea and want to invest right from the start. In contrast to family and friends, "fools" are usually also familiar with the sector in which the new project wants to gain a foothold. This can be an advantage.

Debt capital is often provided by banks. However, it is also possible for private individuals to provide a loan to a company.

The lenders have a claim against the company in the amount of the funds provided. However, they do not become co-owners of the company.

However, certain securities can be agreed in the loan agreement to which the lender is entitled in the event of payment difficulties. Certain information obligations of the borrower can also be stipulated.

The lender receives interest on the capital provided. The repayment of the borrowed capital can be determined individually, either staggered over the term or at the end.

In the event of insolvency, lenders can only lose a maximum of their borrowed capital. Any further loss sharing is not possible. In the event of insolvency, lenders are usually paid out of the insolvency estate after the claims of employees and suppliers have been satisfied.

It is generally very difficult for young companies to obtain outside capital from banks. Firstly, because future business development - and therefore the ability to repay - is very uncertain.

And secondly, because young companies have little or no collateral - and therefore no ability to repay the loan. Secondly, young companies have no or very little collateral that could be deposited.

Business angels are people who provide companies with equity capital at an early stage.

They are therefore equity investors with the rights and obligations already described. However, business angels not only provide capital, but also valuable know-how and actively advise the founders.

Business angels are often founders themselves who have already established and sold a successful company. They now use the proceeds to invest in various start-ups. This makes their advice all the more valuable.

Venture capitalists are very similar to business angels. However, they are not individuals, but companies or investment companies that specialize in investing in start-ups.

They provide the founders with equity capital and intensive coaching in the subsequent growth phases. Venture capitalists select their investment targets according to a highly institutionalized process - in other words, according to very clear rules.

Venture capitalists are generally interested in start-ups in the technology or internet sector.

Another way to raise capital is to take part in competitions. As part of competitions, young entrepreneurs can usually present their business idea and business plan to a jury of experts.

In larger competitions, the winners receive a relatively large amount of start-up capital, which is usually not subject to any special conditions and does not have to be repaid.

An original idea and a convincing presentation are crucial for success in such competitions.

You can find a very good overview of the competitions currently being advertised here.