Check your current financial situation before you start to organise the financing for your business start-up. Equity capital has to be the foundation of any business start-up financing. It reduces the amount of borrowed capital required. This is important for the following reasons:
- A minimum level of equity capital ensures that small losses will not cause insolvency, debt overload or bankruptcy. The more personal capital you have, the lower the risk of cash-flow problems. This can happen even if there are slight deviations from the planning data, e.g. if you have to finance orders in advance or if your turnover is lower than expected when launching the product.
- The greater the share of equity capital in your total investments, the more room for negotiation you have with your lenders. If you are prepared to risk your own money, they will have more confidence in you.
You should be able to cover at least 20 percent of your capital requirement with equity capital. There is not a generally accepted minimum limit. The greater the share of equity capital, the easier economic survival is, above all in times of economic crisis and the less dependent you are on banks.
Please note: If you want to take advantage of financial support, you have to have the "appropriate amount" of equity capital. First of all calculate the amount of savings you have and which capital investments can be turned into cash in the short term. You may possibly have to increase amounts saved until the planned business start-up. Check also what tangible means you can bring into the business. Tangible means are e.g. machines, tools or vehicles.
Equity capital from partners
Equity capital is not only your own capital, but can also come from third parties, e.g. from your family or friends. The capital which business associates such as e.g. co-founders, limited partners, silent partners bring into the business also counts as equity capital.
Tip: Business partners bring additional know-how and support into a company. The German Equity Forum of the Deutsche Börse Group and the KfW Bank or the German Business Angels Network, for example, help to find cash-rich business partners.
Equity capital investors automatically become owners of the business. They bear the risk of losses – possibly even for the total loss. In return, they benefit from the above-average growth in the value of the company.
Note: Borrowed capital on the other hand is deposits from savers which are passed on by the banks "in trust". A special security is required to pass on these funds. Banks demand securities for the credit volume. This does not include individual grant programs. Another difference is that investors of borrowed capital do not become owners of the company from a legal point of view.
Equity capital from participations
Venture capital comes into the business from potential venture capital investors. They can include natural persons and legal entities (venture capital firms). They do not become owners of the company but for example participate in the profits.
The following forms of venture capital are possible:
- Public venture capital firms
(e.g. Mittelständische Beteiligungsgesellschaft – MBG)
This form is a silent participation in the business. The management of the company remains completely in the hands of the entrepreneur. The exit from the company is at face value. This is the value at which the venture capital firm became involved. In return, you have to pay a basic non-profit related remuneration and an additional profit-related payment to the venture capital firm.
- Private venture capital firms
They usually commit themselves to open participations. The venture capital firm supports the company actively and brings in its own expertise. The venture capital firm is closely involved in strategic matters due to being a member of corporate bodies such as the board of directors, supervisory board or advisory board. The exit from the company is at market value. If the participation is successful, this would be above the original initial investment. However you do not have to pay an annual fixed sum.
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The German original version of this text was drafted in close cooperation with the relevant departments. The Wirtschaftsministerium released it on 30.08.2017. Only the German text is legally binding. The Federal State does not assume any liability for the translated texts.
In cases of doubt or if you have any questions or problems, please contact the relevant authorities directly.