Funding is the provision of capital. For startups, it’s the provision of capital that allows you to realize your business plan. To cover the whole funding of your idea you will most likely need several financing sources. In general those sources are divided into equity- and external capital.
Traditionally equity capital is what funds you and the other entrepreneurs invest into the company. Depending on the concept, equity can also be funds that you acquired through selling shares of the business. Later when the company is up and running those funds, provided you keep the profit inside the company, will increase your capital further. In short: Equity capital is defined by being at the company’s disposal for an extended period of time, without being in immediate need of paying it back. Furthermore, it’s the first asset that is liable in case of a problem. Contrary to that is the external capital, which is a classic bank loan. You are aware, that this involves a strict plan for repayment. If problems arise, your own funds are the first to be liable.
The importance of the optimal financing mix are outlined in the following chapter.
The higher your net assets, the more likely banks and investors are going to invest into your idea. A higher rate of personal capital makes the startup safer. No regular interest has to be paid and starting losses can be compensated by using your own resources. Furthermore investing personal capital shows commitment to the project. Due to those facts, external investors usually want to see about 20% non-external vestment.
Generating external equity capital, e.g. by selling shares, is difficult. Only companies with a high chance of success usually get that form of funding. Since the risk of losing all the investment is relatively high, shareholders usually demand a lot of shares for little money. In case of an economic success of your company, you would have to share the profit.
You can compensate by contracting a counter-guarantee bank. These banks are usually supported by their respective government and act as a guarantor for external capital. A fee has to be played for this service.
In reality, if your company goes bankrupt only being liable with your personal assets is highly unlikely. Sole proprietors and shareholders are usually liable with both their professional and private capital. Even using the legal form of a corporation (e.g. limited liability Company) you will be contractually obligated by the bank to bear liability with your private savings. Counter-guarantee banks also hold your private resources liable. This is often misunderstood.
Last but not least an important fact that you should know for planning external investment. The complete bank investment usually consists of several financial products. This mix has to fit your investment plan. The keyword is matching maturity:
Good founding and bank consultants know these things and will secure advantageous and governmentally sponsored entrepreneur loans for you.