4.3 Financial planning
4.3.3 Cost of capital
The cost of capital is also called the cost of financing.
General borrowing costs
Anyone who raises capital must pay money market costs for it. This is usually interest. Interest is granted for the provision of a loan. Interest is income for the creditor and expenditure for the debtor.
The repayment of a loan takes place through redemption.
The discount is a reduction by which the loan is brought below the nominal value of the loan.
Overview of capital costs and types of capital
|
Cost of capital |
Types of capital |
Examples |
|
One-off (start, end) |
Procurement costs |
Commissions |
|
Repayment costs |
Repayment |
|
|
Current
|
Capital utilisation costs Debt service costs Market maintenance costs |
Interest |
Table 22: Cost of capital
The following example shows the calculation of a loan.
Example loan conditions: Nominal value €25,000; discount 10%; n = term, 3 years; t (tempus) = year; percentage rate = 7%; annual fees 0.5% of nominal committed
After deducting the discount, the company has a loan amount with a nominal value of € 22,500 at its disposal. The repayment amount is fixed. The annual debt service results from the payment sequence. It is to be taken into account in the cost accounting or P&L.
Loans for start-ups
Start-ups can take advantage of special funding programmes. Funding requires that the applicant has sufficient technical, commercial and personal competence to set up a business. Founders of an Ich-AG will have to provide evidence of a business plan.
- Entrepreneurial capital becomes: ERP capital for start-ups (0-2 years)
- StartMoney, Microloans
- Advisory support, business development, employment office, IHK, HWK, advisory centres
- Investment allowances for the new federal states in the east and Berlin
- KfW Entrepreneur Loan (Kreditanstalt für Wiederaufbau, Deutsche Ausgleichsbank)
- Special depreciation allowances and savings depreciation allowances for the promotion of SMEs pursuant to § 7 g EStG (Income Tax Act),
- Investment grants as a joint task for the improvement of the regional economic structure
- ERP programmes for investments and innovations
- Equity capital for small technology companies
- ESF funding for SMEs
The funding programmes are constantly being changed. They can be viewed in the internet database of the Federal Ministry of Economics and Labour: www.bmwa.bund.de or BMWA-Gründerportal: www.existenzgruender.de
Deadlines
Meeting deadlines is a key parameter for financing. Usual terms are:
- Short-term loans should only be used for the procurement of current assets. Maturity of up to approx. 1 year; In the case of an overdraft, the current account is drawn down by overdraft. The interest rates are very high. Goods credits are used until an invoice is paid.
- Medium-term and long-term loans enable the company to plan far-sightedly and secure it against short-term capital withdrawal. Medium-term 1 to 5 years, e.g. credit for equipment investments. Long-term 5 years or more, e.g. debentures, depreciation for buildings.
Legal status of the creditor
The legal status of the creditor plays a role in financing that should not be underestimated. It becomes important when it comes to liability and security issues. In addition, the legal form tells who can assert which property and capital claims. While in the case of a partnership, the individual is liable with his or her entire private and company assets, in the case of a corporation, e.g. a limited liability company (GmbH), the liability risk is limited to the amount of the capital contribution - which is at least € 25,000. At the same time, the distribution of profits or the allocation of losses in the case of corporations is made in the amount of the capital shares.