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February 2, 2024
12 min read

Your guide to startup funding

All you need to know about startup funding.

In the ever-evolving landscape of startup funding, is a brilliant business idea alone enough to secure financing? Today, founders have a multitude of funding options to explore, but not all paths are equal. What should early-stage businesses keep in mind?

Let's get straight to the point: Startups require capital to grow. Initially, they don't generate revenue or profits – just ideas. To transform these ideas into scalable businesses, startups need a consistent flow of funding from internal or external sources, with equity or debt.

re:cap_Startup funding

During this funding journey, founders encounter different options and considerations that hinge on factors like their product, funding stage, market, personal preferences, and target audience. 

Before diving into funding, founders must address key questions:

  • Which kind of funding is the right one for my startup?
  • What is the source of the capital?
  • At what stage/phase do I need funding?
  • How quickly do I need financing?
  • How much cash do I need?
  • Do I want to sell or keep shares in the company?
  • What should I pay attention to when preparing for talks with investors?

This article will tackle all these aspects, providing a clear roadmap for a startup’s funding journey.

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Startup financing: which instrument at which funding stage?

Types of startup funding

When launching a startup, founders handle multiple responsibilities simultaneously, including creating a business plan, product development, customer engagement, website setup, and of course, securing funding.

To finance its business, startups have several options. Let’s take a look at those different types of funding for startups.

Bootstrapping, self-financing or internal funding: Control and slower growth

Bootstrapping entails funding your startup using its funds and profits – no external investments. Founders consciously bypass external funding sources, maintaining full control over their business. 

While this approach is viable at any startup phase, it comes with some crucial considerations:

  • They must minimize costs and strictly adhere to their budget
  • The goal is to enter the operational business and generate revenues as quickly as possible
  • They should break even as early as possible and generate a positive cash flow

Through self-financing and the renunciation of external investors, founders retain full control over their startups. They do not give away any shares, have no obligations as debtors to a bank or lender, and build their company without compromise according to their ideas.

However, bootstrapped companies usually grow slowly. It can put them at a disadvantage compared to VC-backed competitors. Besides growing faster, they can also access the network and expertise of their investors.

Family & Friends: Investors from your social circle 

Many startups opt to secure initial funding from family and friends. This approach offers several advantages:

  • The capital is available under favorable conditions
  • Repayment is more flexible than with professional investors

Startups often receive money as an (interest-free) loan or as equity investment. The financing amount is comparatively small and can range between €5,000 and €20,000.

Accelerator: Boost your growth 

Accelerator programs provide early-stage startups with funding, infrastructure (offices, hardware), networking opportunities, expertise, and coaching. These programs are designed to span months, not years.

As the term suggests, an accelerator accelerates a startup's business. To participate in such programs, the idea should already have taken concrete shape, and the company should be founded. With the help of an accelerator, the startup develops a functioning business model and boosts its growth. 

In exchange for shares, startups receive funding ranging from €20,000 to €100,000.

Well-known accelerator programs are:

  • Pro 7/Sat. 1 Accelerator
  • German Accelerator
  • Airbus Bizlab Accelerator
  • APX by Axel Springer and Porsche
  • DB Mindbox
  • Founder Institute
  • Y-Combinator

Incubator: Nurturing startup growth

Incubators support startups in developing business ideas, business models, infrastructure, networks, expertise, and funding. Incubator programs prioritize long-term collaboration between investors and startups, often from six months to five years. In return for shares and decision-making rights, incubators assist young companies in establishing a foothold in the market.

Many incubators specialize in specific business areas. Before opting for an incubator, founders should discover which program is most suitable for their idea.

Well-known incubator programs in Germany are:

  • Greenhouse Innovation Lab from Gruner + Jahr and RTL
  • Hubraum from Deutsche Telekom
  • Main Incubator from Commerzbank
  • 1st Mover

Company builder: Startup funding from scratch 

Company builders specialize in founding and developing startups, often originating their business ideas. They play an active role in the company's operations, handling core elements such as development, marketing, and scaling. 

In addition to funding, company builders provide experienced management and specialized teams, making them unique in the startup funding landscape.

Well-known company builders in Germany, some of which are no longer active, were and are:

  • Rocket Internet
  • HitFox Group
  • FinLeap
  • FoundersLink
  • Next Big Thing

Business Angels: Access to network and know-how

Business angels are private individuals who invest in early-stage companies (pre-seed or seed phase), with sums ranging between €10,000 and €500,000. 

Business angels are often founders, entrepreneurs, or managers experienced in building and scaling companies. Their network and the experiences they bring to the table are as important as their investment.

Through their contacts with other investors, business angels often act as a link between the different funding phases. These connections can be relevant for the startup at a later stage, for example, in preparation for their first Series A.

Venture capital: Large tickets and loss of control 

Venture capital (VC) is one of the best-known forms of startup business funding. In 2022, VCs worldwide invested more than $500 billion in startups, early-stage and growth companies.

Venture capital firms invest equity in startups, which they collect in advance from institutional investors, family offices, or companies. Through their investment, they participate in the venture capital fund. This approach offers high return potential but involves substantial risk.

Financing sums range from €100,000 to several hundred million euros. In return, VCs receive company shares, co-determination, information, and control rights. With VCs, founders often relinquish a great deal of control over their own company, facing a high cost of capital in the event of an IPO or exit.

After a certain period (usually up to ten years), the VC wants his exit, i.e., sell the investment at a profit. In 2022, the average expected return of German venture capital firms for early-stage investments was 36%. 

Startups can access venture capital in different company phases. Usually, it comes into play from the seed phase onwards to finance further growth.

Well-known VCs are:

  • FoundersFund
  • Sequoia Capital
  • Andreessen Horowitz
  • Insight Partners
  • Tiger Global Capital
  • Accel 

Venture debt: Large funding, high capital costs 

Venture debt is another form of startup funding that young businesses use primarily to finance growth in later phases. It is usually granted as a risk loan and is used shortly after or at the same time as financing with venture capital.

With venture debt, startups secure debt between two rounds of equity funding. In this way, they remain liquid and have to deal with less dilution of their shares. Funding amounts range from €100,000 to high double-digit millions.

Funding with venture debt is associated with high costs. Direct costs result from upfront payments after the venture debt contract is closed and interest payments (between 10 and 20%) over a certain period. 

In addition, there are indirect costs, such as warrants, guaranteeing the venture debt investor the right to purchase shares in the company at a later stage. It also ensures that founders have less control over their company. 

Since startups take on debt, which they must pay back – regardless of the company's economic development – they should evaluate this form of business funding carefully in advance.

Alternative debt funding: Tailor-made and non-dilutive 

Recent years have witnessed the emergence of alternative debt funding solutions for startups and growth companies. These solutions rely on data-driven risk analysis and automated processes, offering funding ranging from €100,000 to several million euros. Fintechs have specialized in this. re:cap also offers this type of funding.

Alternative debt funding focuses on the actual capital needs of the company and can be tailor-made to a company's business goals. The objective is to meet the capital needs at the ideal time for the company on a monthly or even daily basis. 

Alternative debt funding offers various advantages: 

  • Startups secure the cash they need, and that fits their business plan
  • No dilution of company shares
  • Startups can agree on flexible repayment terms
  • Funding does not include warrants or equity kickers
  • Funding can be tailored to a specific time, allowing startups to avoid unnecessary capital costs due to overfunding

Revenue Based Financing & Recurring Revenue Financing

Revenue-based financing (RBF) or recurring revenue financing (RRF) also falls into the category of alternative debt funding. 

Revenue-based financing

RBF is a non-dilutive form of funding based on a company's revenues. It is interesting for startups with recurring revenues that want to finance their growth. With revenue-based financing, investors receive a predefined monthly percentage of the company's revenue in return for their investment. 

Recurring Revenue Financing

With RRF, the financing amount and interest are based on the amount of recurring revenue and remain the same over the entire period. Startups usually receive capital only up to a financing limit, which depends on the annual recurring revenues.

Convertible loans: Quick solution for existing investors

With a convertible loan, startups receive debt capital as a loan. In return, the investor can convert the loan into company shares in the next funding round. In addition, monthly interest payments may be due.

Convertible loans are particularly interesting for young companies with existing investors. The existing investors know the business model and the company. This contributes to faster processing. In addition, the administrative burden is low: a convertible loan does not require notarization.

Crowdfunding: Funding from the crowd

Crowdfunding, equity-based crowdfunding, crowdlending: Startups can raise money with the support of many individual investors. 

In crowdfunding, many people give small amounts and thus finance the idea of a company. The unique feature: The exchange between investors and entrepreneurs happens directly on a platform. No banks, institutional investors, or capital funds are involved. 

There are usually three methods to finance a startup with the help of the crowd:

Crowdfunding

The focus is not on the investors' profit but on implementing an idea or a product. In return, the participants receive the final product, which the company has realized with the collected capital.

Equity-based crowdfunding

The investment character is much more present here. Many individuals finance the project of a startup with small amounts (often from €100). In return, they receive a predefined percentage of their investment. There are no rights of co-determination or control. 

Crowdlending

With this form of financing, people grant a loan to a startup in small amounts. The startup repays the loan, including interest, within an agreed term.

Bank loan: Suitable for established companies, not necessarily for startups 

Bank loans are the most common form of financing for established companies. They receive debt from their bank, which they pay back at a fixed interest rate over a certain period. The bank has no co-determination or control rights. 

Due to the predefined conditions and fixed repayment agreements, a bank loan is a type of funding that can be planned well. 

However, a loan is not an option for most startups to fund their business. It is because banks are risk-averse. They require a profitable and proven business model, steady revenues, and tangible assets such as real estate or machinery - things that tech startups usually cannot offer yet.

Therefore, a bank loan is only relevant for a few startups. If it is, a detailed business and financing plan and a certain amount of securities in the form of equity, real estate, or machinery is necessary.

Development loans: Access to public funding

Startups can obtain debt funding also from federal organizations. Those are promotional loans with favorable conditions and simplified access for young companies.

The KfW, for example, grants startup and promotional loans to early-stage companies and small and medium-sized enterprises. The amounts range from €125,000 to €25 million. KfW grants loans in cooperation with the startup's bank and assumes a large part of the credit risk or enables startup funding without equity capital. 

Startup business funding through federal organizations is popular: in 2022, almost 47% of German startups used this form of financing.

Startup competitions: Get feedback and expand your network

At startup or founder competitions, young companies pitch their business idea to a jury of experts. The prize money is usually between €10,000 and 50,000.

Those competitions are particularly suitable for startup funding at a very early stage. At least as important as the money is the feedback from a jury of experts on the business idea and business plan, as well as access to a broad public and potential investors. All of this can become relevant for future financing rounds.

Politics and business often initiate startup competitions. They help to simplify the founding process. Competitions are held for startups in various business phases and industries.

University Programs: Founding while studying  

It's a well-known story that many founders like to tell: We met at university and founded a startup. Universities and colleges are an ideal environment to work on ideas with others and take the first steps toward founding. It is why universities offer various programs and startup scholarships to help founders get started. 

A university grant for startups usually does not provide capital but support (such as living expenses) so founders can fully concentrate on their idea. In addition, universities provide their know-how, coaching, technical equipment, laboratories, or office spaces. 

Students with a business idea gain time and resources to develop a viable product, prototype, or business plan.

How do I find the funding that suits my startup?

The multitude of startup funding options can be overwhelming. To navigate this landscape effectively, early-stage companies must consider several criteria and align their choice with their current phase and goals. Relevant questions to ask include: 

  • What type of capital does the funding offer me, and what additional support will it give me? 
  • In which phase am I, and which financing is the right one in this phase?

Our overview provides some indications of how individual forms of funding can be classified.

re:cap_startup funding
What different kinds of startup funding provide for founders.

But not every instrument is suitable in every phase: an early-stage company that generates revenues and is growing has a greater capital needs than Family & Friends can provide. 

While early, growth and later stages provide a general framework for startups, they are not rigid categories. Instead, they offer broad guidance. Startups often self-determine their phase and funding requirements:

Early Stage

The early stage of a company can be divided into stealth mode, pre-seed, and seed. However, there are no sharp lines between these stages. Rather, a startup determines on its own in which phase it is or whether this classification makes sense at all. 

Stealth Mode: Preparing in secret

Stealth mode describes the pre-founding phase. The founders work on their project in secret. They have an idea for a product or service. They develop a business plan, the preparation for the startup, and the planning of the organization begins.

Pre-Seed and Seed: Concrete Planning and First Successes 

The pre-seed and seed phase includes company founding, market launch, initial sales activities, and hiring. This phase can last up to three years and  includes a first round of funding.  

These phases are usually capital-intensive. The startup generates only small revenues, and at the same time, the product must be developed further, and people need to be hired. The money for these investments usually comes from the founders' own funds, grants, family & friends, venture capital, or business angels. 

Growth Stage

After the successful launch of the startup, the main focus is on creating rapid market penetration and scaling the business model. The startup develops into a scaleup. In this phase, many startups struggle with growth pains. At the same time, the focus is on building marketing and sales activities. 

Growth in the startup context often means burning a lot of cash (cash burn). Therefore, this phase can also be very capital-intensive.

Capital-intensive phase and more diverse capital structure 

However, the mantra of "growth at all costs" no longer applies to all startups. Many—due to a changed funding environment—are taking the path towards profitability earlier. Working efficiently with the available capital has become crucial, especially when approaching new investors.

The growth phase can last several years and is characterized by ever-new funding rounds - such as Series A, B, and C. Again, there is no strict separation. In addition to equity funding, alternative financial instruments based on debt capital are increasingly appearing in the growth stage. The startup sets up its capital structure more diversely. 

Later Stage

In the Later Stage, the startup has been successfully operating for several years. In many cases, the term startup no longer seems appropriate, as these are rather large companies with several hundred employees and fixed structures.

A startup comes of age

In this phase, this company has stable sales, has asserted itself against the competition, and has perhaps even reached break-even or acquired competitors. 

Now it is time to further professionalize the company structures and push ahead with expansion. The step to the stock exchange can make sense here. The capital raised with an IPO can be used for restructuring, further diversification of its products, and entry into new markets.

For which funding phase is which form of financing suitable?

Early, Growth and Later Stages are rough guidelines for startups—no more and no less. Only a few startups can be planned linearly, and end in a successful IPO. 

Rather, startups must react flexibly to the funding of the individual phases and evaluate exactly which instrument is the right one.

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Equity dilution at different stages.

After all, whether a startup is financed internally or externally, with its funds, with debt or equity: at a certain point, it must ask itself which funding case it wants to be and what best fits its ideas and visions. A venture-backed company must meet different external growth expectations than a bootstrapped startup.

That question about funding is closely related to whether the startup:

  • Gives up company shares,
  • retains company shares,
  • takes advantage of a grant,
  • takes a loan, or
  • aims for a funding case with different financing instruments. 

There are advantages and disadvantages for each case. Founders must assess in advance whether building their business is more capital-intensive or it is not. 

For example, if a company is active in a market with a lot of competition, it must spend more time on product development to differentiate from other startups. In that case, it may make sense to sell shares in the company to finance this product development with a larger sum of equity.

How to prepare for a startup funding round

Before any startup business funding, there are several tasks that the startup must complete. Whether funding or starting a business: It all starts with the business plan.  

It all begins with the business plan

Whether a startup wants to finance itself internally or externally, the business plan is mandatory. It not only must convince investors, banks, and other capital providers. The business plan also helps founders to position their ideas within an entrepreneurial concept and the economic environment. 

A business plan includes:

  • The Executive Summary
  • Information about the business model and the idea
  • Information about the founders
  • A market and competition analysis
  • Information on marketing and sales
  • Product development planning
  • Information on personnel planning
  • A SWOT analysis
  • The financial plan

The finance plan is the heart of the business plan

The finance plan is the core component of a business plan. It answers the question of how much money a startup needs. 

Therein, the founders explain based on estimates and projections: 

  • How much capital their startup will need to cover all costs.
  • How much their startup can expect to earn with their business idea.

The financial plan gives investors and banks an indication of whether an investment is worthwhile and whether they will get their money back (including return or interest).

The pitch deck contains the most important information 

When startups present their idea to investors, they "pitch" their business model. This presentation is called a pitch—and it requires a pitch deck. 

A pitch deck is based on the most important facts and information about the business model. Information that does not help explain the idea is unnecessary. The pitch shows potential investors what the product and the market environment offer, ideally backed up with figures. 

The deck names the problem and the corresponding solution provided by the startup. It also shows its unique selling proposition (USP) and if there are already competitors. The pitch deck should make investing " tasty" for investors and show them which opportunity they might miss.

Addressing investors and elevator pitch

The approach to investors is closely related to the pitch deck. Before approaching investors, founders need to be clear about what they want:

  • Are the founders risk-averse or risk-averse? 
  • Do they want to face the pressure of VC funding? 
  • Do they want the company to grow quickly or slowly? 

A realistic self-assessment of which type of founder you are helps here. 

In the end, this also determines how founders approach investors. After all, discussions with a venture capital fund differ from those with a family office or a business angel. For banks, on the other hand, different things are more relevant than for public investors. 

When talking to investors, the founders must be able to condense the most crucial points and communicate them in just a few minutes. It is called an elevator pitch. The elevator pitch summarizes the business and financial plan and the pitch deck.

Company valuation: How many shares do I sell?

Whether pre- or post-money valuation, venture capital method, or discounted cash flow: part of the preparation for any external startup funding with venture capital is that startups think about their company valuation. 

This involves determining the amount of funding needed based on the financial plan and the number of shares to be offered in return. Realistic valuations are crucial for investor discussions, as setting the value too high can scare off investors, while undervaluing the company may result in excessive share dilution.

The following factors influence the valuation and give startups initial pointers:

  • Founder's reputation: Have they already shown they can build a startup?
  • An experienced team that knows the target market and the business environment 
  • First sales successes
  • The potential to expand into other markets
  • The USP of the product and the business potential that comes with it

Startup business funding is complex, but yet essential  

Securing funding for a startup is a complex yet essential journey. Beyond business development, the availability of capital is paramount to its growth and success. With multiple financing options at their disposal, the path founders choose should align with their business model, market environment, and personal aspirations and objectives. 

At the same time, external factors, such as a weakening VC business or an expensive interest rate environment, can also play a part. Startups have little influence on these.

What remains is that startups should think carefully about which path they take regarding their funding. Whether with debt or equity, alternative or traditional instruments: Funding decisions can have long-term effects. The founding team should evaluate these carefully.

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How do SaaS companies work?

SaaS stands for Software-as-a-Service and refers to a licensing and distribution model by which companies offer software solutions online as a service.

What growth stages do SaaS companies go through?

After the preparatory early-stage phase, the product goes live, becomes better known, and establishes itself in the market, before the customer base ideally expands significantly and finally either a company sale, a merger, or further growth takes place.

Why is revenue financing ideal for SaaS companies?

In the important second growth phase, when SaaS companies are already on the market and generating recurring revenue, revenue financing provides flexible SaaS funding based on the ARR without dilution or loss of control.

What is ARR?

ARR refers to annual recurring revenue. Specifically, in the subscription economy, ARR refers to the annual value of regular revenue generated through subscriptions.

What does ACV mean?

ACV stands for Annual Contract Value and in a SaaS business, it refers to the average annual value of a subscription - i.e., the holistic contract value excluding one-time fees divided by the contract term in years.

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What is a corporate loan?

As a counterpart to the personal loan, the corporate loan serves entrepreneurial purposes - as a short-term cash injection for liquidity needs or as an investment for long-term growth. Entrepreneurs use the borrowed capital, for example, for new personnel, a larger office, marketing, better hardware, or the company's establishment.

What kind of business loans are there?

A short-term business loan runs for a few months or years, while a long-term loan runs for several years. If a company needs capital quickly, an overdraft is an excellent short-term loan financing option - there are not many conditions to be met for this, as the principle is similar to an overdraft.

What are the providers of business loans?

There are many providers of business loans. Three overriding types come into focus:
- via the principal bank
- state-subsidized
- digital solutions
The first way is via the branch banks. The options are diverse, whether long-term or short-term credit, investment or working capital credit, just like the linked conditions. Subsidized corporate loans are also run through the house bank, but regional or nationwide development banks (such as KfW) are involved here.
Modern solutions come from FinTechs that specialize in smart financing. Whether credit or alternative, this is where startups and large companies meet technology-savvy innovators of the digital age.

What is the advantage of corporate loans?

A corporate loan is usually available quickly. In addition, because it is debt financing, founders do not have to give up control as well as company shares and do not have to share profits with lenders.

What is the disadvantage of business loans?

Business loans come with interest and are often tied to a specific purpose, so entrepreneurs are limited in how they can use the capital. It is also usually a restrictive concept with strict repayment terms, warrants, and very little flexibility - which is why many companies are looking for a suitable loan alternative.

How do credit and loans differ?

Some refer to short-term financial assistance and a smaller amount as a loan and to longer terms and higher capital as a loan. However, the terms are usually used interchangeably.

What are the interest rates on corporate loans?

They can be less than 1% or in the double digits. The credit rating determines this: the higher the risk class, the higher the interest rates. The amount of capital, term and any collateral also determine the interest rate. Therefore, it is always a good idea to compare different corporate loans.

Who grants corporate loans?

Companies can obtain the traditional loan from their principal bank - a government subsidy via federal or regional development banks is also possible. Modern variants come from FinTechs, which use technology-driven solutions for smart financing.

What are the alternatives to corporate loans?

Various financing solutions work with equity and debt. With equity financing such as venture capital, founders lose valuable company shares and often have to give a say. A particularly smart alternative to corporate loans and equity financing is non-dilutive, non-restrictive and very flexible turnover financing.

What is the best credit alternative?

There is no all-comprising answer to this question, as financing is always an individual solution. However, recurring revenue financing is increasingly establishing itself as a particularly attractive and popular alternative to loans and equity financing.

What makes re:cap stand out as an alternative to loans?

With re:cap, SaaS companies can obtain growth capital very easily and quickly - up to 50% of ARR. The innovative funding works with planned revenues and also flexibly aligns repayments accordingly. In addition to on-demand financing, re:cap offers valuable insights and benchmarks on request.

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What does debt financing mean?

In debt financing, companies receive a certain amount of money from an external investor. The company holds the debt capital for a limited period and must be repaid - usually with interest and within a fixed time duration.

What does debt capital include?

Debt capital includes typical liabilities of a company, such as loans, bonds, and provisions, as well as unique forms like deferred income.

What are examples of debt financing?

There are various types of debt financing, which can basically be divided into short-term and long-term debt. Unique and mixed forms are also possible - examples:
- Short-term: overdraft, trade credit, acceptance credit
- Long-term: promissory note loans, bonds, long-term bank loans
- Special form: leasing, factoring, asset-backed securities
- Mixed form: mezzanine as a mix of equity and debt financing

What is short-term debt capital?

Short-term debt capital is provided to companies for a short period of time - repayment usually takes place within a few months. Such capital is primarily used to meet short-term liquidity needs.

What is long-term debt?

Long-term debt capital is provided to companies for a longer period of time - repayment usually occurs within several years. The capital is used for investments.

What is the difference between equity and debt financing?

From the perspective of the capital providers, it is primarily a question of liability because, in the case of equity financing, capital providers are liable for entrepreneurial activities. In return, they usually receive a share and benefit directly from the profits. Because founders relinquish shares and entrepreneurial control, this is referred to as a dilutive type of financing. This is not the case with debt financing, which involves interest and is generally more restrictive.

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How can I finance my startup?

From bank loans to private savings to equity financing: There are many ways to finance a startup - through external providers and your own capital. As a novel and popular solution, so-called revenue financing is also becoming more and more established in Germany.

Which companies fund startups?

In addition to investment companies from the venture capital segment, there are innovative FinTech companies such as re:cap. They innovate to create modern funding solutions. re:cap enables companies in the subscription economy to trade future revenues for on-demand, non-dilutive capital. Fast, transparent and easy.

Who is startup funding with re:cap suitable for?

The funding solution from re:cap is specifically aimed at subscription companies that reach a growing customer base with their already launched product and generate predictable, recurring revenues. In addition, the legal entity must be at least partially located in the EU.

How quickly can I get startup funding?

As long as you are within your financing limit, you can access new funds as often as you like. The financing limit will be increased based on the growth of your business and the track record on the re:cap platform.
The funding will typically arrive in your bank accounts within two business days once it gets approved.

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What is working capital?

Working capital is also called operating working capital. It is the difference between current assets and current liabilities and, as a balance sheet ratio, provides information on companies' capital stock and financial strength.

What does working capital tell us?

The working capital figure shows which funds are tied up in regular company operations - it can also be used to determine whether working capital financing is necessary.

Is high working capital good or bad?

A positive value shows that current assets can cover current liabilities - this is important in terms of the golden rule of the balance sheet. A negative value conveys a risk, because affected companies are considered to be illiquid. This can lead to financial bottlenecks.

Can working capital be too high?

The question of working capital levels is answered differently depending on the company or business model - especially across industries. However, working capital levels that are too high often indicate that working capital is being used less wisely and that too much cash is being tied up.

What are examples of working capital?

In business management, working capital is usually indirect and long-term goods that companies need for their products and services. A distinction is made between tangible resources, such as warehouse and office space, and intangible ones, such as licenses.

How does working capital financing work?

Working capital financing allows companies to increase their working capital and generate positive value. It provides them with short-term cash to pay liabilities or make investments.

What are the different working capital options?

Working capital financing is multifaceted. Depending on the industry and business model, various types may therefore be considered, such as drawing on the credit line, receivables credit, factoring, and inventory lending. Increasingly popular are alternative solutions such as non-dilutive and non-restrictive sales-based financing.

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What is a convertible loan?

The definition of a convertible loan is simple: it is a normal loan in which the company does not repay the borrowed amount after the expiration of the term, but converts it into company shares. It is therefore technically a combination of both equity and debt.

How does a convertible loan work?

The following scenario is a typical example of a convertible loan: A company receives capital with a predefined interest rate. The parties agree on a term and also a discount on the company's shares, which acts as a risk compensation. At the end of the term, the investor receives the shares in the amount of the convertible loan plus interest - so-called qualified capital for the company.

How high are convertible loans?

Usually, convertible loans are around 100,000€ - but they can also be up to 400,000€ and more. To collect as much capital as possible, start-ups often arrange several convertible loans with different investors.

What should a convertible loan agreement regulate?

In principle, there is freedom of contract here - a convertible loan agreement is therefore not subject to any legal rules. The following components are the basis: the amount of the loan, the interest rate and discount, and the term. In addition, some parties agree on a cap (maximum valuation) or a floor (minimum valuation). Subordination is also included in many convertible loan agreements.

What is an alternative to the convertible loan?

Founders can obtain convertible loans quickly and easily and use them flexibly. These advantages also characterize re:cap's convertible financing. However, convertible financing involves giving away shares. This is not the case with re:cap's solution, which is non-dilutive funding for sustainable growth. Therefore, it is an ideal alternative to the convertible loan.

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Is crowdfunding free of charge?

No. In case of success - i.e. if your project reaches its target budget - you pay platform and transaction fees between 4 and 12 percent to the crowdfunding platform. The exact amount depends on the platform. If your campaign fails, you pay nothing.

Why is crowdfunding so popular?

Crowdfunding brings many advantages. The fact that the legal form and creditworthiness of the project do not play a role in crowdfunding certainly plays a major role in its popularity. Thus, especially creative people and artists of all kinds, as well as non-profit initiatives, can collect money for their projects. The positive marketing effects, as well as customer proximity and loyalty, also ensure the good reputation of crowdfunding.

Who is crowdfunding suitable for?

Crowdfunding originates in the artistic sector for financing various creative projects in the fields of music, film, theater, and art. Today, however, it is also used by private individuals, non-profit organizations, and companies of all kinds - whether in the startup phase or as a boost in ongoing operations.

What are the different variants of crowdfunding?

There are four types of crowdfunding, which differ primarily in the consideration:
1) In equity based crowdfunding, investors receive returns on their investments.
2) In reward based crowdfunding, the initiators provide non-cash or intangible compensation for the investment.
3) In donation based crowdfunding, investors donate their contribution.
4) In lending based crowdfunding, the investors grant private loans with a fixed interest rate to the initiators.

How do I receive crowdfunding?

Whether you are a startup or a medium-sized company: crowdfunding can theoretically be 'applied for' by anyone. However, success depends on how many investors are convinced by the project. Anyone who wants to try their hand at crowdfunding must first create a campaign on one of the common crowdfunding platforms and advertise it on their own channels.

Does crowdfunding make sense?

Crowdfunding offers particularly many advantages for private, non-profit, and creative projects - or as a supplement to public funding. In addition, crowdfunding can be particularly worthwhile for early-stage startups that have largely completed their product development and now need fresh capital for growth. Young companies that want to test their business model or product can also benefit from the communication and participation of a crowdfunding campaign - providing an indicator for other forms of financing.

Is crowdfunding proprietary or debt financing?

Crowdfunding is financing based on debt capital. The capital provided comes from a large number of investors, mostly private individuals and companies - the so-called crowd or swarm. Hence the term 'crowd financing'.

What are the alternatives to crowdfunding?

Crowdfunding is considered an alternative financing option, which is opposed by several common alternatives (or supplements). Among them are public funding, corporate credits, venture capital, or even founder competitions. Newer forms of financing, such as re:cap's recurring revenue financing, offer another alternative to crowdfunding.

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What is factoring?

The definition of factoring is simple: to quickly receive the money from open invoices and generate liquidity, companies hire a factor who settles the outstanding payments as an advance and takes over the accounts receivable management. It is therefore a sale of receivables.

How does the selling receivables work?

The factor checks the verity of the invoice and the creditworthiness and default risk of the debtor. Then the factor pays the majority of the outstanding invoice amount to the contracting company, usually within 48 hours. After the factor has collected the receivable from the debtor, the company receives the remaining gross amount that the factor has retained as security.

What types of factoring are there?

Anyone interested in factoring should take a closer look at their options because there are differences. In recourse factoring, the factor bears the full risk of default. Less secure - from the point of view of the selling company - is non-recourse, in which there is no protection against bad debts. If companies do not want their customers to know about factoring, they can choose the silent option.

What are the risks involved in factoring?

Since there is a large number of factoring companies, companies can quickly end up with a provider whose credit rating itself is weak. However, the performance of a factor is not always directly apparent. In the worst case, the assigned factor goes insolvent and the company loses a lot of money. In addition, some customers see it as a sign of mistrust if it is not the company providing the service that demands payment but a third party unknown to them - this could be circumvented by silent factoring.

What are the costs of factoring?

There is no single answer to this question because the fees are very opaque - based on various key business figures. In addition, the total costs are not only made up of a clearly defined factoring fee but of several items. Interest often accrues as well.

What are the most popular alternatives to factoring?

TexSince factoring is revenue-based financing, other revenue financing options are also great alternatives to factoring. This is also true for re:cap's solution - it is tailor-made for companies with a subscription business model that generate predictable, recurring revenue.t

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What are venture capital alternatives?

Venture capital is not suitable at all times - and not for every type of company. Common alternatives are:
- Venture debt (hybrid debt financing),
- Founder competitions,
- Government subsidies
- or alternative forms of financing,such as crowdfunding.
Companies with subscription business models can also exchange their future revenues for immediately available capital - with re:cap financing.

When is venture capital worthwhile?

Generally for founders and entrepreneurs in the growth phase. But not every startup is attractive to investors. Venture capital funding is worthwhile when the business idea is innovative, the sales argument is clearly recognizable, and the founding team is convincing. In addition, the market must promise growth.

How do I get venture capital?

Private venture capitalists, also known as business angels, and so-called venture capital companies provide equity capital. But not just like that. If you want to go into fundraising, you have to be convincing. Prerequisites are a watertight pitch, a realistic understanding of the current company valuation, the amount of capital needed and the time frame in which the capital is needed.

How does venture capital work?

Venture capital is a form of private equity financing in which venture capital companies provide capital to promising unlisted companies in exchange for a stake in the company. Those who want to grow their company with venture capital must first contact investors and convince them of the company's merits.

How long does venture capital take?

Often several months pass between the start of fundraising and the receipt of venture capital. The pitch only follows after the founding team has identified potential investors. Afterward, the company is preliminarily reviewed by the potential investors. If this goes well, a term sheet is signed, followed by due diligence. The capital will flow only when the investment documentation has been completed.
If you can't or don't want to wait that long, you can look for alternative forms of financing like the one offered by re:cap. With re:cap you can bridge the time to the next round and thus, optimize the upcoming financing round. At the same time, this increases your options when looking for investors.

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What is alternative financing?

These are forms of financing that companies can use as an alternative to established models such as loans - they are often modern solutions that are quickly and easily available digitally.

What are the different types of alternative financing?

The market for alternative financing options is growing, so companies can already choose a model that suits them individually. The better-known ones include convertible loans, factoring, crowdfunding, and venture debt. Alternative debt instruments, including recurring revenue financing or revenue-based financing, which have been successfully established in the U.S., are still rather new in Germany but becoming increasingly well-known and popular.