Whether starting an independent business, setting up a franchise, or taking over an existing company, self-employed individuals must be able to finance their venture—which usually means taking out a loan.
The more trustworthy the business appears to a potential lender, the more favorable the terms will be. An important factor that positively influences the terms is the equity ratio—that is, the portion of the investment that the entrepreneur personally puts at risk. In addition, numerous funding opportunities are available to entrepreneurs.
A Solid Plan for Success
A prerequisite for obtaining a loan or funding is a compelling business plan that includes, among other things, the business idea along with its unique selling proposition, as well as a market and competitive analysis. In addition, a financial plan must be prepared that outlines how the founder intends to maintain sufficient liquidity at all times to pay regular supplier invoices and service the loan. Equally important is the need for start-up capital to finance all initial investments—such as the store’s interior and the initial product lineup. Lenders are also interested in a profitability forecast: When does the entrepreneur plan to turn a profit, and what revenue does he or she anticipate?
Rely on the expertise of partners
Franchise founders can rely on the franchisor’s experience in all these areas. If it is an established system that is already operating successfully at multiple locations, the franchisor should have system plans that outline, for example, how long it will take to pay off loans and how much capital is needed for each location. These plans make it easier for the franchisee to develop plans for their new business. Above all, the franchisor can provide guidance on exactly what the plans must include, the timeframe over which the franchisee should plan ahead, and—most importantly—what critical questions the bank might ask.
Favorable Terms Thanks to Guarantees
Torben L. Brodersen, Managing Director of the German Franchise Association (DFV), also offers an important tip: “The DFV has been working with the Association of German Guarantee Banks (VDB) for many years. The guarantee banks therefore have excellent expertise regarding franchise systems.” On the DFV’s website, entrepreneurs can download the free financing guide, which was developed jointly by the DFV and the VDB—the edition for new entrepreneurs is available to everyone, regardless of whether they are members of the DFV or not.
The usual path to a startup loan begins with the borrower’s primary bank. If the bank approves the loan, it may involve the guarantee bank. The guarantee bank guarantees 80 percent of the loan, which entails additional costs for the borrower: between 0.8 and 1.5 percent of the loan amount as an annual fee, plus a one-time processing fee of one percent of the guarantee amount. In return, the guarantee provides the borrower with the necessary security and thus secures the lending bank’s approval. Furthermore, a guarantee serves as additional collateral, which has a positive effect on the loan interest rate—so, all things considered, it’s definitely a win for the entrepreneur.
Guarantee Without a Bank
Under the name “Guarantee Without a Bank,” guarantee banks also offer startup consulting to work with the aspiring entrepreneur to determine whether a guarantee is a viable option for them. This is available for loans of up to 500,000 euros, though there is a fee. This allows the entrepreneur to have their business plan thoroughly reviewed in advance without immediately alienating a lending bank.
Investment Companies
In addition, there are other loans available to new entrepreneurs: For example, the Small and Medium-Sized Enterprise Investment Companies (MBGen), which—just like the guarantee banks—are present in every federal state, offer promotional loans for entrepreneurs. The MBGen’s approach is to support job creation and economic growth in every federal state. The advantage for founders: The investment from the MBG, which can range from 25,000 to 2.5 million euros, is formally considered equity and strengthens the founder’s negotiating position with the lending bank.
Alternatives for Experienced Entrepreneurs
This applies primarily to first-time founders. Experienced entrepreneurs who want to open an additional business have other options available to them. These may include, for example, the ERP loans offered by KfW, including the so-called “start-up grant,” which can be applied for up to three years after the business begins operations.
Conclusion: Financing must be well prepared, consultations sought early on, and applications submitted in a timely manner. Nevertheless, just because the first bank rejects the loan application doesn’t mean you shouldn’t start your business. Aspiring entrepreneurs shouldn’t let themselves get discouraged too quickly—it’s best to make a list of potential banks and consult the least popular one first—just for practice. But don’t tell them you got that idea from us!
