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At the beginning of self-employment, you have to successfully complete the difficult start-up phase in order to achieve a market position that generates the necessary foundation for your own company. The first stage on the path to successful self-employment as an entrepreneur should therefore be completed.
From this point on, it’s all about setting up and expanding your own studio. For larger projects and, above all, a larger number of orders, additional employees must be hired and the technical infrastructure must be raised to a new level. Especially if you want to work with large partners, you are usually greeted with a symbolic list of necessary requirements.
It is obvious that there may simply not be enough funding available at the time of the project. Major financial leaps are simply not possible. It becomes particularly problematic when larger financial investments or expenses have to be made in order to obtain orders. At this point, the topics of financing and funding come very much into focus.
Financing your own studio and promoting its development can turn out to be tricky tasks. Across Europe, there are over 6,000 funding programmes for small and medium-sized enterprises – SMEs for short. It is particularly important to know the difference between a start-up and an SME that has already existed for some time and to know how to utilise it. It is therefore important to take a closer look at the topic of funding and financing step by step and to internalise the most important aspects. The topic of funding is extremely complex, as a large number of requirements must first be checked and then the guidelines for suitable funding measures must be analysed.
The desire for funding
The rudimentary search for funding pots is relatively simple. The classic method is the tried and tested search engine, which shows the respective institutions on whose homepage you can search for funding programmes again. Alternatively, you can browse through countless start-up magazines or portals specifically tailored to start-ups. Between all the numbers and contact points, there are certain things you should think about beforehand. You need to be aware of what a funding programme is in detail and how to deal with it as an entrepreneur.
Types of funding
But first an introduction to the types of funding. Before you actively start looking for funding and financing, you should know which types are available. The most common types of funding can be symbolically categorised in a four-part pyramid.
At the bottom of the pyramid are equity investments. Equity investments are not normally of interest to newly founded start-ups. If you have just established a company, you have no intention of bringing investors on board and thus no longer being the master or mistress of events and diluting ownership rights. However, this can change later on in the company’s development, particularly when the business model is scaled up.
Above the participations are the guarantees. The second highest field in the pyramid contains loans and at the top are the highly coveted grants. Grants are extremely popular as they do not have to be repaid by the respective grant recipients. It is important to bear in mind that the requirements for grants are also the highest.
The largest range of subsidies is available in the form of loans. The fact is that start-ups generally do not have much – if any – collateral. Very few founders can provide machinery or even a land charge as collateral. However, if you want to take out a loan from your bank, collateral is required.
In order to compensate for the lack of collateral and the possible lack of equity capital and to close the gap, guarantee banks come into play for a so-called deficiency guarantee.
Another aspect to consider before starting a search is the different levels at which different funding pots are available.
The very first place to start looking is usually at state level, as the various federal states sometimes provide special funding programmes for start-ups and SMEs and support certain regions – depending on their economic development – with lucrative funding offers, for example in the case of rural funding. If no suitable funding is available there or does not fit into the concept or business plan, the search continues at federal level.
Depending on the political orientation, both state and federal funding always addresses so-called fashionable topics, such as digitalisation and Industry 4.0. If no suitable funding is available even at federal level, then funding opportunities are sought at European level, possibly with collaborative projects.
Earmarked funding
It is advisable to limit your own search to the state and federal level and to look primarily for grants and subsidised loans. A very important point has not yet been addressed at this point: Subsidies are first and foremost earmarked.
You need to be clear about what exactly the funding is to be used for. As a rule, at this point you realise relatively quickly that you have to draw up a detailed analysis of the actual need for funding along with repayment modalities. And now comes the crux of the matter: the analysis must be precisely matched with the various funding programmes.
So while you are working out whether the funding is needed for an investment, an innovation or for obtaining working capital, you realise that each funding programme has its own guidelines and criteria. For example, a funding programme for investments may exclude (partial) use for working capital.
Help?
As the wording of the funding programmes and the underlying guidelines and application forms are highly legalistic, the majority of start-ups usually find it difficult to analyse and check them. As applying for funding also entails liability risks in the event of intentional or unintentional misrepresentation, it is advisable to seek professional funding advice.
This includes independent subsidy consultants as well as counselling services offered by the Chamber of Industry and Commerce or other (local or regional) business development agencies. In principle, anyone can call themselves a business or funding consultant, as there are no mandatory qualification requirements to be met.
In the case of independent subsidy consultants, it is therefore advisable to do some research in advance and to check their references and fee model. It can happen that a less qualified consultant takes less account of important points for the funding application or even overlooks them, which can have a negative impact on the processing time or the overall success of the application. In principle, initial consultations are also offered free of charge by independent subsidy consultants. As the consultant’s working time required for a detailed funding analysis depends on the complexity and number of grants for the desired purpose, it is not possible to determine an exact time frame for the analysis.
If you need funding advice or analysis in a so-called fashionable area such as digitalisation, the funding consultant may have to examine and analyse more than 30 grants and loans. If, on the other hand, the focus is on niche funding, the number of funding programmes to be examined and analysed may be manageable. Nevertheless, the applicant or start-up should ensure that the consultancy fee provides for a cost cap or a flat-rate consultancy fee or, at best, that the remuneration is performance-related.
In addition to independent funding consultants, there is also the option of using the regional consulting firms mentioned above. In most cases, the initial consultation with an experienced consultant in this sector is free of charge. Based on the initial consultation, a so-called action protocol is also drawn up along with an offer for the next steps. You can then take your time to decide whether you want to take these steps or whether you want to take a different route.
How the respective steps and services offered are remunerated varies. It also depends on the amount of funding involved. Professional subsidy advice is fundamentally independent of the subsidy amount. Ideally, the consulting service is designed in such a way that non-repayable grants and subsidised loans are success-based. In this respect, a fee is only charged if the applicant or start-up receives funding as part of a grant or loan project. The question remains as to how the fee is usually calculated. In the industry, fees of between 1% and 1.5% of the loan amount are due for loan projects, depending on the amount of funding.
The situation is somewhat different for grants. A successful grant project usually incurs a fee of up to 12.5 % of the incoming and remaining grant funds. It can therefore make sense not to commission an independent funding consultant for lower sums.
If the fee agreement of an independent funding consultant does not provide for performance-related remuneration, start-ups will incur corresponding consulting expenses and liquidity outflows. For this reason, start-ups should consider whether they should first contact a free consultant, for example the local Chamber of Industry and Commerce, or a local business development organisation.
For example, the St. Georgen Technology Centre, as the local business development agency, offers start-ups free advice on funding through its management.
Of course, the three parties mentioned above are not the only ways to obtain funding advice. You can of course also go to your local bank and ask for advice. It is important to bear in mind that the house bank would prefer to recommend and promote its own products and services, especially as the margins for arranging funding are rather low for the house banks. It can therefore happen that the one or other interesting subsidy programme is not actively included in the advisory focus of the house bank.
All that glitters is not gold
Financing and subsidies are an important component when it comes to keeping your own company alive and expanding it. However, such a funding application also harbours risks that you should be aware of. We are of course talking about liability.
Who is liable if something goes wrong? Even if favoured subsidies and grants are recommended from all sides, you should be aware that a subsidy application is not just a means to an end, but must be filled out truthfully to the best of your knowledge and belief – and that potentially received subsidies must be used exclusively for the intended purpose. Accordingly, you have an obligation to provide proof to the institutions that provide the funding. It is therefore very important to avoid vague information and to provide details that are as precise as possible.
The obligation to provide evidence is met by protocols that are submitted and checked. You cannot simply submit a funding application and, for example, enter fictitious employees who are responsible for certain areas or state trainees instead of trained specialists. Deliberate misrepresentation constitutes an act of fraud which, in addition to the immediate repayment of the funding received, is punishable by a prison sentence of up to 5 years or a fine in accordance with Section 264 (a) of the German Criminal Code (StGB).
Who is liable for the fraud at this point is simple: the applicant! It is the applicant – and not the consultant – who signs the funding application. In principle, as a shareholder of a start-up founded in the form of a corporation, you should not be under the illusion that you are personally exempt from liability. Despite a limited liability company, personal liability usually comes into play if the company is either unable to provide the equity capital that is sometimes required for funding programmes or if the house bank requires standard bank collateral that cannot be provided by the company itself.
Insolvencies
In addition to the liability for fraud described above, a start-up entrepreneur is also liable in the event of delayed insolvency. As many start-ups discontinue their business activities within the first three years due to losses or a lack of liquidity, insolvencies are not uncommon among start-ups. Even before the insolvency application has been filed, the rude awakening occurs.
Keyword: lack of diligence. As an entrepreneur, you have no room for manoeuvre or decision-making. According to Section 43 (1) GmbHG, the managing director must exercise the diligence of “a prudent businessman”. If the managing director does not file the necessary insolvency petition in good time, a dreaded authority is alerted, namely the public prosecutor’s office.
Let’s assume that the insolvency maturity of the corporation was clearly exceeded before the insolvency application was filed. Payments made by the managing director after this maturity status must then be paid out of his or her own pocket into the insolvency estate or company treasury. The regulation is even significantly tightened in the event of a crisis. This can be found in § 64 GmbHG.
However, a lack of diligence is only one way of slipping into personal liability. The next step involves an investigation for delay in filing for insolvency. At this point, however, you should not fall into a kind of state of shock, but instead devote yourself conscientiously to the application for funding and, above all, to your own company. It is now important to have an experienced subsidy consultant, preferably in the last instance through your house bank, determine exactly how much funding you really need and not apply for horrendous sums that you cannot repay.
Large sums should be analysed by a consultancy firm if the order situation or turnover is stable and the repayment modalities are secure.
Mitigating the debt: release from liability
If you enter into a debt relationship as a founder, you must repay the entire amount – the loan – together with the agreed interest. If you are unable to repay the amount due to a lack of liquidity, you are liable with the collateral you have deposited. This is why there is also talk of debt mitigation in connection with a release from liability.
As a start-up, you generally have hardly any collateral, which is why a guarantee bank or, for start-ups, a development bank is specifically called in. House banks borrow the required funding amount – if approved – from the respective development bank, for example KfW. The house bank then lends the funding amount to the borrower – in this case the founder. The latter are nevertheless liable to the house bank for the entire loan amount. The house bank, on the other hand, is liable to the development bank for the entire loan. Liability can, of course, be reduced, but not for the founders, but for the house bank through a release from liability of 50 % to 100 % of the loan amount.
The main reason for the exemption from liability is to motivate the house banks to make a loan possible for young founders, even if there is little collateral available. The development bank effectively shares the risk with the house bank. What is important about the concept of the release from liability is that it is recognised that the release from liability is not a substitute for the lack of collateral vis-à-vis the house bank. If you are no longer able to service the instalments or the risk of loan default is extremely high, then in the event of insolvency, the collateral of the borrower – the founders – is distributed between the development bank and the house bank on a percentage basis after the realisation of the collateral. The founders usually have to accept a small interest surcharge. If you borrow money that is not available in advance and is needed, then you also have to pay it back to the respective institution. The borrower, the founders, remain fully liable for repayment.
