4.4 Capital requirement calculation

Raising capital is a prerequisite for founders and companies to be able to realise a business at all. The following table can be used to check and determine what capital is needed and what collateral is available for it.

Example equity capital

Raising capital Euro	Total	Date before foundation	Date after foundation
Existing equity capital
Cash assets	10.000 €	10.000 €	€
Bank balances	20.000 €	20.000 €	€
Contributions in kind necessary for operations	5.000 €	€	5.000 €
Own work, e.g. car, licence (if capitalisable)	€	€	€
Loans to relatives	5.000 €	€	5.000 €
Donations	5.000 €	€	5.000 €
Total equity	45.000 €	30.000 €	15.000 €
Building loan contracts*	Only conditionally EK
Life insurance*	Only conditionally EK

Table 26: Raising capital

The sum of equity capital should not be less than 10 - 20 percent of fixed assets. Once the amount of equity capital has been determined, it is necessary to establish how high the borrowed capital must be, measured against the total capital requirement.

*Bauspar contracts or life insurance policies represent a special form of equity capital. As a rule, building savings contracts are not immediately available and must be used for the specified purpose - provided they are endowed with public subsidies. In principle, only the savings contributions paid in are equity capital. In the event of an early payout, only the savings contributions paid out would be capitalisable. However, if a property or land is to be acquired for a business, the disbursable savings amount could be accepted as equity. Interest and repayment would be recognised as current business expenses. In addition, building savings contracts can serve as collateral.

 

Example debt capital

Raising capital Euro	Total	Date Before foundation	Date After foundation
Required debt capital
Loans for start-ups	50.000 €	50.000 €	€
Loans from special subsidies	10.000 €	€	10.000 €
Funding from private third parties	€	€	€
Overdraft	5.000 €	€	5.000 €
Supplier credit	2.500 €	€	2.500 €
Change	€	€	€
Total borrowed capital	67.500€	50.000 €	17.500 €

Table 27: Debt capital

 

Support programmes

Money from public funding programmes plays an important role in raising capital when starting up a business and also afterwards. The federal government, the Länder and the EU support the start of entrepreneurial self-employment through funding programmes. This is especially true in the new federal states. These are mostly loans, but also non-repayable grants. Typical features of public development loans include favourable interest rates, long terms and often a repayment-free period of up to three years until repayment must begin. This means that during this time they are free of interest and repayment.

The federal government's promotional programmes are offered by KfW Mittelstandsbank. There are additional advisory institutions in each location:

• ERP equity assistance programmes (EKH): http://bmwisoftwarepaket.de/InfoArchiv/1356,1375/3023.html
• ERP start-up programme: http://bmwisoftwarepaket.de/InfoArchiv/1356,1375/3024.html
• Entrepreneur Loan DtA-StartGeld: http://bmwisoftwarepaket.de/InfoArchiv/1356,1375/3021.html
• DtA microloan: http://bmwi-softwarepaket.de/InfoArchiv/1356/3234.html
• Consultancy funding: http://bmwisoftwarepaket.de/InfoArchiv/1354/2952.html

Other funding programmes

• Investment allowances
• KfW Capital for Work Programme
• Special depreciation allowances and capital allowances to promote SMEs
• Investment grant (joint task "improvement of the regional economic structure")
• ERP-Beteiligungsprogramm, ERP-Innovationsprogramm u. a., Beteiligungskapital für kleine Technologieunternehmen (BTU),

Advice is worthwhile, it does not have to be expensive. Without advice, a lot of money can be given away.

Applications for public funding must be submitted to the house bank before the start of the project. Financial commitments may not be entered into beforehand. No subsidies will be granted retrospectively (exception: investment allowance).

Prerequisites: Funding through public financial assistance - especially for start-ups - requires that the applicant can prove that he or she has sufficient professional and commercial qualifications. In addition, it is usually expected that the business start-up will lead to a sustainable "full-time existence" as the main source of income.

Collateral

Once the amount of debt capital has been determined, it must be examined which collateral can be offered to a lender. It is up to the lender to decide which collateral to accept.

 

Raising capital Euro	Total	Date before foundation	Date after foundation
Existing collateral
House and land ownership	€	€	€
Building savings contract	€	€	€
Life insurance	€	€	€
Personal guarantee	€	€	€
Indemnity bond of a bank	€	€	€
Total collateral	€	€	€

Table 28: Loan collateral

 

• The collateralisation of house bank loans is influenced by the type and reliability of the creditor in his previous monetary transactions with the bank. Those who have always met their payment obligations on time in the past have better chances than those who have fallen behind with their payments.
• Collateral for house bank loans can be provided by transferring the company's assets as security to the lender. If the fixed assets are not sufficient, personal guarantees of the entrepreneur are common. The personal guarantee overcomes the limitation of liability, e.g. of a limited liability company, for the bank.
• The collateralisation of house and land property may be appropriate for longer-term loans. The amount of collateral is based on the market value of the property.
• Life insurance policies can serve as collateral for long-term loans, e.g. real estate.

 

Guideline value for lending limits

Land	30 - 80 % of the market value
Bank balances	100 % of the nominal value
Life insurance	100 % of the surrender value
Customer receivables	to the public sector up to 90 % of the claim amount
Customer receivables	Against other customers 30 - 50 % of the receivable amount
Customer receivables	For tax refund claims up to 100 % of the refund amount
Securities	Federal treasury bonds up to 90 % of the nominal value
Securities	Public debt securities 60 - 90 % of the market value
Shares, equity funds, bond funds, certificates	30 - 70 % of the market value
Guarantees	Depending on creditworthiness and assets
Warehouse	30 - 50 % of the cost price
Shop fittings	30 - 50 % of the current value
Machinery and business equipment	30 - 50 % of the current value
Cars	30 - 50 % of the current value
Precious metals	50 - 70 % of the metal value

Table 29: Guideline value for lending limits

 

Every founder and entrepreneur must determine his or her capital needs:

Example capital requirement

Total capital Euro	Total	Date before foundation	Date after foundation
Equity	20.000 €	15.000 €	5.000 €
+ Debt capital	67.500€	50.000 €	17.500 €
= Total capital available	87.500 €	65.000 €	22.500 €
Total capital required	75.000 €	65.000 €	10.000 €
= Surplus/shortfall	12.500 €	0 €	12.500 €

Table 30: Capital requirements