No money, no honey—and that goes for startups, too. Raising capital is an important—and, unfortunately, often difficult—issue when it comes to starting or expanding a business.
A study by KfW found that only 21% of German entrepreneurs take advantage of a subsidy loan, while nearly as many (22%) rely on a bank loan to finance their business.
Yet startup loans, such as KfW Bank’s ERP Startup Loan – StartGeld (067), offer attractive terms that are precisely tailored to the needs of an entrepreneur.
In this article, we’ve clearly summarized the advantages of a startup loan. We also use an example to explain how the loan application process works.
Who is eligible to apply?
Small and medium-sized enterprises (as defined by the SME criteria) that are either newly established or have been in business for no more than three years are eligible to apply. Individuals planning to take over a business or acquire a stake in a company are also eligible for funding. Side businesses can also be funded, but only if they are converted into a primary business in the medium term.
Furthermore, the business venture must demonstrate the potential for sustainable economic success. To ensure this, the applicant must, among other things, prove that they possess the necessary technical and business qualifications. Equity capital, on the other hand, is not strictly required but can be advantageous.
What exactly is eligible for funding?
Specifically, funding may be provided, for example, for the purchase of land (including ancillary construction costs), the purchase of machinery, equipment, and furnishings, operating and office supplies, and the initial procurement or replenishment of inventory.
What are the loan term, interest rates, and grace periods?
For a loan term of less than 5 years, you can take advantage of up to one year of grace period; for a 10-year term, the first two years are even grace periods. Interest rates are currently as low as 2.07–2.6%.
An example: Mr. Müller
Mr. Müller wants to open a bakery. To do so, he needs €70,000 in capital. To obtain a startup loan, Mr. Müller first writes a detailed business plan in which he also outlines his expected capital requirements. He describes exactly how much money he needs for each purchase. Mr. Müller must also explain why his bakery will be successful. For example, he can point out that there are no other bakeries within a 3-kilometer radius and that he has training as a baker and pastry chef, as well as many years of professional experience.
He submits the completed business plan, along with the KfW Bank loan application, to his primary bank. The bank reviews the viability of the business plan and the company’s prospects for success. If both are deemed satisfactory, the local bank forwards the application and the business plan to KfW. KfW then makes the final decision on whether to grant Mr. Müller the loan.
However, the loan is not transferred to Mr. Müller’s account as a single lump sum. Up to €30,000 is immediately available to him as working capital, and Mr. Müller is not required to provide details on how the funds will be used. With this money, for example, he could pay the first few months’ rent, cover advertising costs, and staff expenses; Mr. Müller can also use this money to cover his own living expenses during the start-up phase.
Now Mr. Müller would like to purchase dough mixers and an oven worth €20,000. He submits the invoice for these business purchases to KfW via his bank in order to receive the funds for this specific investment. After a few days, Mr. Müller receives the funds from KfW via a transfer to his account and is able to pay the amounts due. Some time later, he needs the remaining €20,000 for store fixtures and an initial restocking of inventory (flour, sugar, butter); he also submits the invoices for these individual items and subsequently receives the funds.
Depending on the loan term, Mr. Müller then begins repaying the loan (plus interest) in monthly installments after one to two years. He begins paying interest from the very first day; however, since the interest rate is not very high, this does not represent a significant financial burden.
