When you start your own business, you have a wide variety of financing options available. However, not all of them are equally suitable for every start-up. The amount of financing, the purpose of the financing, the nature of your business, your risk tolerance and other factors play a role in planning and implementing the appropriate financing strategy.

Generally, financing options can be divided into 5 main categories:

1. Financing completely from your own funds (bootstrapping)

   You have sufficient capital to finance your company yourself and thus remain independent.

2. Loans and subsidies for start-ups

   Initially, loans offer greater financial flexibility. However, interest and repayment installments can become a burden.

3. ”Gründungszuschuss” and other subsidies

   These do not usually have to be repaid, but are always a voluntary benefit.

4. Financing with the help of external investors

   They bring money and often experience, but want to share in the profits of your company and are given a say.

5. Financing through alternative financing options

   Factoring, leasing and mezzanine capital are just three of the alternative options available to you for financing your business.

Self-financing/bootstrapping 👞

Self-financing a company is often referred to as „bootstrapping“. A bootstrap usually is tied tightly, as are the resources of the young company. Bootstrapping is about being frugal, investing time rather than money, and producing positive cash flow as quickly as possible. Sometimes the term „Family & Friends“ comes up in this context: this refers to friends and family members who support the startup with donations or interest-free loans.

Financing from your own resources is, of course, only an option if you have the financial means to do so. In this case, however, self-financing has several advantages: Your company remains completely independent of credit institutions or external investors. In addition, there are no interest or redemption installments. A self-financed company can also appear more creditworthy or potential investors. This is an advantage if you want to take out a loan or work with investors in the future.

However, bootstrapping also has disadvantages: Liquidity bottlenecks are often occuring, and financing through friends or family in particular harbors some potential for conflict. Bootstrapping is therefore most suitable for patient entrepreneurs with strong nerves.

Loans and subsidiaries 🏦

The typical financing options for start-ups include loans, in particular the classic loan from the bank. However, it is particularly difficult for self-employed people to provide the necessary collateral. A Bürgschaftsbank (guarantee bank) can help with this: It takes over the guarantee, so that the house bank is more inclined to grant a credit.

A good alternative are loans from development banks, which offer significantly more favorable conditions for business start-ups. One of the best known is the KfW start-up loan. For smaller investments, overdraft facilities or microcredits come into question. If you are not successful with banks or microcredit institutions, you also have the option of a personal loan. These loans are granted online and are also known as „crowdlending“.

The advantages of a loan are obvious: liquidity is secured, faster growth becomes possible. As a rule, loans generate significantly higher sums than self-financing or grants. The disadvantages include above all the interest and repayment installments, which can be considerable for larger sums. In addition, the capital is only available for a certain term. Last but not least, the bank or creditor must be convinced of the company’s viability – definitely a challenging task for start-ups that want to use this financing option. Loan financing is therefore most likely to be considered by entrepreneurs who can provide collateral and/or guarantees as well as a solid business plan.

Depending on the amount of financing, the following loans may make sense for you:

• very small investment: overdraft facility
• up to 25,000 euros: microcredit, personal loan
• up to 150,000 euros: personal loan, development bank
• up to 500,000 euros: Promotional bank, house bank

Gründungszuschuss and other subsidiaries 💰

In the past, the best-known support for business start-ups was the start-up grant from the Arbeitsamt. This is granted over 6 months with 300 euros per month in addition to ALG 1. Afterwards, 300 euros can be paid out for another 9 months. Since there is no legal entitlement to the start-up grant, good preparation with a well thought-out business plan is crucial before applying.

The EXIST start-up grant is aimed at students, graduates and research assistants who want to go straight from university into business start-up and focus on technology-oriented or knowledge-based projects.

Other possible grants also include financing offers from individual federal states, such as the NRW start-up grant, or government grant programs such as the INVEST – grant for venture capital from the Federal Office of Economics and Export Control (BAFA). In addition, there are also development loans that pay out part of the loan amount as a grant – you then do not have to repay this part.

The great advantage of grants for start-ups is that they usually do not have to be repaid. Founders should therefore always consider this financing option in order to be able to get their own company off the ground in good financial shape. The disadvantage, however, is that there is no legal entitlement to such a grant – it is always an optional benefit. When applying, your business plan must therefore be watertight.

External investors 👨🏻‍💼

Investors support young companies because they believe in their idea and potential. In return, they contribute their own capital, often also their own experience and/or their network. In addition to the term „investor“, the terms „incubators“ and „accelerators“ have also become established. Both stand by the entrepreneur, for example by making their own production facilities or office space available to them or by providing intensive advice and coaching on setting up the company.

Another form of working with investors is crowdinvesting. Here, start-ups can present their project and investors have the opportunity to invest even the smallest amounts. Due to the amount of contributions, considerable sums can be raised. An alternative to crowdinvesting is crowdfunding, which, however, is more a way of product pre-financing. In return for participation, the „backers“ – the people who support the project – receive a thank-you, which varies depending on the contribution amount.

Venture capital, in turn, is interesting for start-ups that have already been „financed“ by business angels and have a larger sales volume.

If committed investors can be found, this brings great advantages: not only is there enough money available, but the investor often also brings along a lot of experience and good contacts. On the other hand, the investor usually shares in the company’s profits, which creates obligations. If company shares are signed over, the investor even gains a certain say in the process – so you give up some of your independence as an entrepreneur.

Alternative financing options 🤑

If bank loans, development loans and even innovation-driven financing by business angels or venture capital are not an option for your startup, you can turn to special other financing options. The most common alternative forms of financing include:

• Factoring: Factoring provides liquidity and can thus significantly reduce costs in the case of an overdraft, for example.
• Leasing: A widespread form of financing. Leasing has a neutral effect on the balance sheet, so the company’s financial leeway remains intact.
• Mezzanine capital: This financing option is one of those in which the financier participates in an economic success in addition to the usual interest on the loan.
• Crowdfunding: In crowdfunding, you can have your project supported in exchange for smaller or larger consideration.
• Competitions: Competitions for founders not only entice with prize money, but also provide additional exposure for your company.

Whether it’s grants, loans or investment, once you need to convince others that your business is viable, a well-developed financing plan is the linchpin to successful financing.