Financing of Start-up

24.11.2020 | Financing & Promotion

Start-up scene in Germany

If one looks at the founder numbers, which are determined annually by the Kreditanstalt für Wiederaufbau (KfW) (cf. KfW Gründungsmonitor 2017, available at, it becomes apparent that the financial requirements for a business start-up are actually lower than generally assumed. Thus, according to the current KfW study, almost one in ten business start-ups begins a self-employed activity without resorting to non-cash or financial capital (so-called “Karenzgründer”). Three out of ten founders use exclusively private capital in kind for their independence (founders of material resources). These material resources are economic goods such as the private computer or the own car. The majority of the founders of new businesses – about two thirds – use financial resources to start up their businesses, but only about one third of all founders of new businesses depend on external financing. And even among these, only one in ten of all start-ups had a need for external capital of more than EUR 25,000 (macrofinancers). In contrast, 14% of all start-ups had a need for external capital of no more than EUR 25,000 (microfinance providers).

Neither material nor financial resources8 %
Only material resources 29 %
Also financial resources63 %
– thereof only own funds39 %
– thereof microfinance providers14 %
– thereof macro financiers10 %

Furthermore, the KfW determined that the need for financial resources amounted to an average of EUR 17,000, of which only slightly more than half (EUR 9,500) was covered by borrowed capital. These figures show that in most cases the actually required outside capital is often overestimated.

Funding opportunities

Wenn man nicht über genügend eigene Finanzmittel verfügt, um ein Unternehmen zu gründen, ist zu überlegen, ob man sich Fremdkapital beschaffen kann. Je nachdem, in welcher Finanzierungsphase sich das Unternehmen befindet, bestehen mehrere Möglichkeiten, von denen die wichtigsten im Folgenden beschrieben werden.

Friends and family

In addition to their own funds, founders can invest those of family members, friends or partners (including the “3 Fs” for family, friends and fools) in the company. However, this presupposes that there is a willingness to do so and that the funds are available. The advantage of this type of financing is that the funds can be obtained easily and informally. In addition, the interest and repayment rates are freely negotiable and tend to be favorable. Forbearance is often exercised in case of payment difficulties.

However, the emotional impact of this form of financing should not be underestimated. It is one thing for the founder to risk his own assets. But if the company becomes a failure, you end up not only without money, but possibly also without friends.


Banks only grant loans. These are usually short-term and can be obtained very flexibly. For a loan, the banks do not receive any shares or co-determination rights in the company, only interest. However, the loans are only granted against collateral. The classic bank loan is therefore rarely an option for start-ups. It is more likely to be granted in case of a later need for financing, for example in the expansion phase, when turnover and profits have already been achieved and annual financial statements confirmed by auditors, accountants or tax consultants are available.

Public funding programs

In addition, there are numerous support programs of the European Union, the federal government and the states. These are mostly loans, but also guarantees and grants that do not have to be paid back are possible. Typical public subsidy loans are especially favorable interest rates, long terms and often a relatively long period of time until repayment has to be started.

Public promotional loans must always be applied for through the house bank (house bank principle). It first checks the technical and commercial qualifications of the founder, the business plan and all other necessary documents. Only if the house bank is convinced of the entrepreneurial abilities and the project, it forwards the documents. It should also be noted that applications for subsidies must be submitted regularly before the start of the project. No subsidies are granted afterwards.

A complete overview of all promotion programs of the federation, the countries and the European Union are nested in the Internet data base, of which in the following promotion programs which are the most important for existence founders are briefly represented.

EXIST-Gründerstipendium (EXIST start-up scholarship)

The EXIST-Gründerstipendium supports students, graduates and scientists from universities and non-university research institutions who want to realize their founding idea and convert it into a business plan. The start-up projects should be innovative technology-oriented or knowledge-based projects with significant unique selling propositions and good prospects of economic success. The scholarship holders receive non-repayable grants to secure their personal livelihood:

PhD founders3.000 EUR/Monat
Graduates with university degree2.500 EUR/Month
technical staff2.000 EUR/Month
Students1.000 EUR/Month
Child supplement150 EUR/Month and per child

Grants of up to EUR 10,000 for individual start-ups and up to EUR 30,000 for teams are available for material expenses. Costs for coaching measures are covered up to a maximum of 5,000 EUR. The maximum funding period is one year.

ERP start-up loan – StartGeld

Thus founders as well as self-employed persons and small enterprises, which are not yet five years active on the market, may possibly receive a low-interest financing of projects in Germany with a outside financing volume up to 100.000 EUR. All forms of business start-ups are supported, i.e.

  • the establishment or takeover of companies and the acquisition of an active participation,
  • side job, which in the medium term is geared to the main job,
  • consolidation measures within five years of commencement of operations,
  • re-establishment of the company, if there are no more liabilities from a previous self-employment.

ERP capital for foundation

Founders as well as freelancers and medium-sized companies that have been active on the market for less than three years are offered low-interest and subordinated financing of projects in Germany up to 500,000 EUR. In addition, the banks in charge can alleviate the risks on the basis of a federal guarantee.

KfW Entrepreneur Loan

The program targets domestic and foreign companies in the commercial sector (manufacturing industry, crafts, trade, leasing companies and other service industries) and freelancers who have been active in the market for at least five years. Up to 25 million EUR are granted, whereby the credit period can be up to 20 years. Projects abroad are also supported.

ERP Participation Program

This funding is intended to expand the equity base of small and medium-sized enterprises by providing capital through private equity companies. To this end, these companies receive refinancing loans from the ERP Participation Program, which are granted on the basis of a guarantee from a bank guarantee (Bürgschaftsbank) . As a rule, investments of up to EUR 1.25 million are financed, but the investment should not exceed the available equity capital. Repeated ERP-supported participation is permitted as long as the respective maximum amount is not exceeded. In exceptional cases, investments of up to EUR 2.5 million are possible.

ERP Innovation Program

The aim of this program is the long-term low-interest financing of market-oriented research. It serves the development of new products, production processes or services as well as their essential further development. The financing is granted either as an integrated financing package consisting of a traditional loan (debt tranche) and a subordinated debt (subordinated tranche), or as pure debt financing.

Microcredit Fund Germany

With this, the German government wants to improve access to capital for smaller entrepreneurial activities. Natural persons as well as micro and small enterprises are eligible to apply. Support is provided in the form of a loan. The loan amounts to up to EUR 20,000 and has a term of up to four years.


The Federal Employment Agency can promote unemployed persons interested in setting up their own business who receive unemployment benefit I (Arbeitslosengeld I) with the start-up subsidy. This is a discretionary benefit, so there is no legal claim. The support period is up to 15 months and is divided into two phases.

  • Phase 1: In the first six months after the start of the company, the founder receives a subsidy in the amount of his individual monthly unemployment benefit as well as a monthly lump sum of 300 EUR for his social security (health insurance, nursing care insurance, retirement provision).
  • Phase 2: After the first six months, a second funding phase of another nine months may follow. During this period, only the lump sum of EUR 300 for social security will be paid. In order to receive this, the founder must provide evidence of his business activities and his full-time entrepreneurial activities.

Entry money

This support can be applied for if the founder receives unemployment benefit II (Arbeitslosengeld II) and starts a social insurance-liable activity out of unemployment, whose monthly salary is more than 450 EUR, or if he takes up a full-time self-employed activity. The basic amount of the starting allowance is calculated on the basis of the regular monthly requirement. In addition, an amount may be granted that takes into account the previous period of unemployment and the size of the household. Special personal circumstances can also be taken into account when calculating the entry money.

The funding period is a maximum of 24 months. Whether and how much money you will receive on application even before taking up employment is decided by the respective personal or the contact person at the responsible job center. In particular, it is checked whether the applicant will probably no longer be dependent on unemployment benefit II in the long term due to the new employment and whether the support is necessary for integration into the general job market. In the case of start-ups, the predicted economic viability of the company as well as the personal suitability for the desired self-employment are also checked before a positive funding decision is made.

Innovation vouchers

The federal government and some of the Länder issue innovation vouchers to small and medium-sized enterprises. Under certain conditions, these vouchers provide them with financial support for planning, developing and implementing new products or services or for improving their quality. The BMWi innovation vouchers can be used to cover up to 50% of the costs of external consulting services for potential analyses (maximum EUR 5,500), implementation concepts (maximum EUR 13,750) and project management (maximum EUR 8,250). Baden-Württemberg, for example, gives innovation voucher A for EUR 2,500 for scientific activities in the run-up to the development of an innovative product, service or process innovation, for example for technology and market research, feasibility studies, materials studies, design studies and studies on production engineering. Innovation Voucher B for EUR 5,000 is intended for implementation-oriented research and development activities aimed at developing innovative products, production processes and services to market or production maturity, for example design services, service engineering, prototype construction, design, product tests for quality assurance and environmental compatibility.

Promotion of entrepreneurial know-how

This program is aimed at young companies that have been on the market for no more than two years (start-ups), companies from the third year after founding (existing entrepreneurs) and companies in economic difficulties – the latter regardless of the age of the company (companies in difficulty) – that meet the EU definition of small and medium-sized enterprises. Funding is provided for general advice on all economic, financial, personnel and organizational issues of business management, special advice to counteract structural inequalities, and advice on securing the future of the business.


Business angels are wealthy private investors with an entrepreneurial background, who provide capital for all start-up phases, especially the early seed and start-up phases. In most cases, a business angel brings his experience from his own professional career into the company as an additional ideal value.


These institutions take care of the “hatching” and “breeding” of young companies. The goal is to increase the survival of the young companies, to shorten the time to market entry and to provide the necessary resources (at a reduced rate). Incubators also support their start-ups in applying for subsidies. Many universities and cities/communities now have such incubator offers.


In crowd investing, capital is raised jointly by many small investors. This is made possible by Internet platforms on which the start-ups can present themselves to a large number of investors. If a start-up arouses the interest of the platform users, an investment can result. Well-known crowd investing platforms are for example:

  • Kickstarter (,
  • Seedmatch (,
  • Crowd Nine (


Venture capitalists are companies or funds that specialize in providing temporary venture capital. They invest in rapidly growing (young) companies, for which they contractually agree on information, control and participation rights and offer at least passive management support. Venture capital is provided either directly by companies (corporate venture capital) or institutional captive funds (with banks, insurance companies, pension funds or private individuals as investors).

Unlike banks, venture capitalists generally do not require collateral from the founder of a business. However, in return they expect above-average growth and high returns as well as an exit option, i.e. the possibility to get out completely, for example by selling the shares when taking over the company. Since they have a strong interest in the positive development of their portfolio companies, they often actively support the management and help to implement the plans.

The most common form of financing in practice is the granting of so-called convertible notes. This is a convertible loan that is initially granted as a loan in order to be converted into shares at a later date as part of a fixed event, for example, a further financing round. This loan carries an interest rate, a maximum value (cap) and a discount.

The resulting procedure is explained using the following example:

A venture capitalist invests 100,000 EUR with a maximum value (cap) of 1 million EUR. If a new round of financing now takes place, the initial investor can choose whether to continue the loan or convert it into equity:

  • If the company is now valued at EUR 2 million, i.e. twice as much as the agreed cap, the venture capitalist acquires 10% of the shares in the event of conversion instead of just 5%.

  • If the valuation results in only EUR 0.8 million, i.e. if it is below the agreed cap, the venture capitalist receives a discount in case of conversion, which can be between 10% and 30% depending on the agreement. With a discount of 30 %, the initial investor receives 17.86 % of the shares instead of 12.5 %.