Company founders regularly see themselves after the actual start-up phase before the question of expansion and growth financing. In principle, the start-up has a variety of financing alternatives available that need to be weighed against each other.
Of particular importance in recent times is crowdfunding / crowd investment. In addition to economic and corporate law factors, tax considerations in particular play a key role, which must be taken into account.
Financial action alternatives
Regarding the financing of the underlying business idea, the start-ups have different alternatives for action. Hereby, the basis of any financing decision must not only be the pure financing requirement, but also further strategic decisions have to be considered.
So differences have to be made with regard to
- the object of financing (resources, R & D, operating costs, etc.) and
- the amount of funding (contribution of collateral, guarantees, etc.)
- as well as regarding the possible strategic involvement of investors.
Particularly in the start-up area, the possibility of additional external impact (in particular PR or advertising effect), free attention or even an additional distribution channel (eg crowd funding) plays an important role. For start-up companies, the following financing alternatives are typically available:
1. Debt Financing
Debt capital is often seen as an interesting and start-up financing, as no shares in the shareholder have to be given by the founders, so that the control as well as the actual value of the company remains with the founders.
However, in our experience, this is usually a miscalculation, since promotional banks and state start-up programs in most cases impose extremely rigid conditions, thereby restricting start-up companies in their flexibility and, at the same time, guaranteeing collateral on a regular basis Founders are required.
In particular, because of the self-enforceable guarantees, founders who have invested not only a lot of work in the initial phase, but also mostly their financial savings in their company, quickly get personally into financial calamities.
Debt financing, however, can make sense, especially on a smaller scale. In our opinion, this is the case in particular in cases in which, as a result of already secured equity financing, the directors’ guaranties can be avoided.
2. Equity Financing
In addition to debt financing, equity financing is a typical form of financing for start-ups – especially in the initial phase. However, raising equity capital for young entrepreneurs is the most pleasant way to raise capital.
Be it at the beginning to a small extent through friends and family or later through business angels and institutional partners. However, the influence of investors and the complexity of several shareholders should not be underestimated.
Against this background, founders should formulate a medium-term investment strategy from the outset and consider further financing rounds early in the process. It may make sense to identify alternatives to direct equity participation.
By pooling different shareholders in an ” investment company “, holding shares by trust or a silent participation, in which the investor is not involved in financial decisions on decision-making, complexity can be taken out of the shareholder structure from the beginning.
Cash management, including accessing debt / equity financing, is a highly underrated skill. Done right: invisible. Done wrong: deadly.
3. Crowdfunding / investment
One form of start-up financing now established in Germany is crowdfunding / investment.
In Crowdfunding (from the English words crowd = quantity and funding = financing), the company sells products or services before completion and delivers the product at a later date to be determined. Thus, the so-called crowdfunder (= lender) grants the start-up an advance on subsequent benefits.
In particular, this financing method can be used to finance start-ups with limited access to traditional equity capital and the cautious provision of capital by lenders, products, and the implementation of equity or equity-related business ideas, usually in the form of partisan loans or silent participations.
When Crowdinvestment there is the possibility, outsiders with small amounts and without large administrative effort bundled to participate in the company. This can be done as a direct or silent participation.
In addition, crowdfunding or crowdfunding financing offers the opportunity to be used as an instrument of market research as well as in connection with product development.
Alternatives of expansion and growth financing
After the successful first phase of a business start-up (so-called seed phase ), the growth phase is started on a regular basis with a successful proof-of-concept-and-market. This begins when the business model has successfully established itself in the market and then the next expansion steps are made.
In the growth phase, the necessary financing amount increases, the value of the company increases and investors measure the success of an existing or potential investment much more clearly in clearly defined key figures than in the seed phase. For example, liquidity planning plays an important role in the growth phase.
Particularly in the growth area, this financing can be supplemented very well with support programs, especially in the area of personnel and resources. Depending on the location and industry, new employees can be promoted, recruited or programs can be used from job creation measures.
It may also support the creation of new jobs or further investment in product development.
In addition to the points made in the area of financing, the tax orientation of starting a business also presents a challenge that should not be underestimated. For example, the choice of legal form requires a central tax decision that must be carefully considered and, if necessary, reconciled with the financing structure,
In terms of taxation, for start-ups in the recent past, the form of the mini-GmbH or so-called UG (entrepreneurial company), which represents a corporation, has proven to be a frequently chosen legal form.
Especially for start-ups, the legislator has created a favorable legal form with the UG in terms of start-up costs, which grows into “full GmbH” in later years.
The tax burden of the GmbH or UG results from this
- corporation tax (15%)
- plus solidarity surcharge (5.5% of corporation tax)
- as well as the trade tax (depending on the rate of levy of the community about 14%),
so that regularly results in an effective tax burden of about 30% at the level of society.
It should be noted that in the case of a distribution up to the level of the shareholders of the corporation, there is a (further) tax burden on the distribution.
Founders should consider holding their personal shares in the company via their own holding company in the legal form of a corporation (also regularly a UG), as this may be advantageous for tax purposes in the event of a distribution or even later sale of the investment.
In terms of taxation, debt financing is generally advantageous, as the resulting interest is tax-deductible. Although losses are typically accumulated at company level in the early years, borrowing for tax purposes should be considered in view of future loss carryforwards.
However, with regard to the tax-related use of loss carryforwards, it should be borne in mind that a possible partial or complete loss of the loss carryforwards can be a threat in the case of possible subsequent changes of shareholders.
The above explanations therefore make it clear that the tax orientation of a start-up should be designed as early as possible, taking into account the chosen financing structure, as otherwise adverse effects may arise
Conclusion: The early bird catches the worm
Company founders are already confronted at an early stage with multifaceted financing and taxation challenges.
These can significantly lead to a positive development of the start-up and set favorable conditions for later developments.
It is important to actively deal with these issues in the early start-up phase.