Startup funding in Germany

Starting a business can be daunting, especially securing the crucial financing. In Germany, however, there is a wealth of funding programs waiting to ignite your entrepreneurial spirit. Dive into this guide and discover the keys to financial support tailored to every stage of your founding journey.

A business funding program is a great way to obtain financial support for your company. These programs can come from the federal government, individual states, or private institutions and are designed to support companies financially across different development phases. The three primary development phases for companies are the pre-seed phase, the foundation or seed phase, and the growth phase.

Pre-Seed Phase

The pre-seed phase refers to the initial development stage of a company, when it does not yet generate revenue. Financial incentives can provide the funding needed for market research, prototype development, and team building.

Foundation or Seed Phase

The foundation or seed phase is when the company begins its business activity and needs funding for product development, marketing, and customer acquisition.

Growth Phase

In the growth phase, the company has established itself on the market and needs financial incentives to expand production, hire additional staff, and open up new markets.

Purposes of Financial Incentives

Financial incentives serve various purposes, including:

• Investments: Incentives designed to promote investments in a specific region, industry, or sector.
• Working capital: Funding used to cover the day-to-day expenses of a company or organization, such as paying employees or purchasing materials.
• Research and development: Incentives intended to promote investment in research and development projects in order to drive innovation and competitiveness.
• Specific purposes: Incentives provided for very specific purposes, such as environmental sustainability or social welfare initiatives.
• Personnel: Incentives aimed at attracting or retaining highly qualified or specialized staff, such as tax benefits or other financial rewards.

1. Types of funding and support programs for founders in Germany

In Germany, there are over 2,500 funding programs for founders, which can be roughly divided into five categories: grants, subsidized loans, guarantees, equity, and mezzanine capital.

1.1. Grants

Grants are financial subsidies for founders and self-employed people, based on certain criteria, that generally do not have to be repaid. Tax incentives can also be provided to promote investment, such as the depreciation of assets or the reduction of taxable income.

1.2. Subsidized loans

Subsidized loans are a type of loan with favorable conditions, such as lower interest rates, longer repayment periods, and sometimes even interest-free payments. These loans are provided by development banks that support projects promoting economic and social development.

1.3. Guarantees

Guarantees are a form of financial support, usually provided by a third party (often a public institution), to ensure repayment of a debt or loan. They can increase the borrower's creditworthiness and make it more likely that a bank loan will be approved.

1.4. Equity or venture capital

In this form of financing, an investor provides a sum of money in exchange for shares in the company, becoming a shareholder. The number of shares received is based on the valuation of the company. This option is often used by start-ups or by companies that need substantial funding to grow.

1.5. Mezzanine capital

Mezzanine capital is a type of financing that combines elements of debt and equity. It can help a company finance growth without giving up ownership or control.

2. Successful funding for founders

Which forms of funding actually lead to success? The following are among the most common and important for founders:

2.1. Non-repayable grants for founders and young companies

a. Consulting support to start your company

To qualify for financial grants, certain prerequisites must be met, such as a professional business plan to convince investors of your business idea. Consulting services can help you apply for the grant and prepare and review the business plan.

These services certainly cost money, but fortunately there are grants to cover those expenses. Depending on their personal situation and the federal state in which they are located, founders can receive grants that cover up to 70% of the costs of a start-up consulting service.

The most well-known of these programs include:

• AVGS: Aspiring entrepreneurs who are currently unemployed may be able to obtain Activation and Placement Vouchers (AVGS), which can be used to access free coaching or consulting services from a professional advisor. These vouchers are issued by the Federal Employment Agency or job centers and are 100% funded.
• The program for the promotion of entrepreneurial know-how: Provides funding for consulting services for newly founded companies that are no more than 2 years old, through the Federal Office for Economic Affairs and Export Control (BAFA). The program covers all economic, financial, personnel, and organizational issues in business management. The amount of funding can be up to 3,200 euros depending on the location of the company. In addition, BAFA offers additional support for companies run by women, people with disabilities, immigrants, and other minority groups.

Weitere Informationen zu diesen Programmen finden Sie hier.

b. Founders grant from unemployment

One option for founders to obtain financing is the founders grant from the Federal Employment Agency. This grant supports people who previously received unemployment benefit I (ALG I) and want to start their own business after a period of unemployment. It is intended to support them financially until the company generates sufficient income. The grant does not have to be repaid even if the company fails.

The grant can last between 6 and 15 months. In the first 6 months, it is based on the previous unemployment benefit payments plus an additional 300 EUR for social insurance. After the first 6 months, additional funding of up to 9 more months can be applied for, generally comprising a flat 300 EUR for social insurance, without the unemployment benefit portion.

Since 2023, the grant can also be applied for if the applicant is in principle available to the labor market, as long as all other requirements are met.

Proof of economic viability

Um den Zuschuss zu erhalten, muss ein Nachweis über die wirtschaftliche Tragfähigkeit des Start-ups erbracht werden. Dieser Nachweis erfolgt durch ein Gutachten einer anerkannten Institution wie etwa Handelskammern, Gründungszentren oder Banken. Um dieses Gutachten zu erhalten, ist die Einreichung eines umfassenden Geschäfts- und Finanzplans erforderlich, damit die Experten das Potenzial der Geschäftsidee bewerten können.

Additional requirements

To qualify for the grant, you must be registered as unemployed for at least one day, be under 65 years old, and have at least 150 days of remaining entitlement to unemployment benefit (exceptions apply if the founder has a disability). It must also be demonstrated that your self-employment will be your main occupation.

In addition, you must prove your personal and professional suitability for self-employment, which may include participation in training or other measures.

c. GRW grants for investments in fixed assets

This program was developed to promote regional economic development and job creation by providing financial support to companies in the industrial and service sectors.

The GRW grant covers up to 45% of the costs during the foundation phase, including investment expenditures (such as new buildings, equipment, or machinery) in the first three years and personnel costs for newly created jobs in the first two years.

The amount of funding available depends on the size and location of your company within Germany. The maximum share of reimbursed investment costs varies by region and company size. Small, medium, and large companies can qualify for different funding levels.

Regional policy aims to mitigate economic disadvantages in certain regions and promote equal living standards throughout Germany. For this reason, the regions with higher funding rates are mainly located in East Germany, with the highest rates found in border regions.

To apply for a GRW grant, you must submit an application form, a financing plan, a business plan, and, where applicable, proof of SME status (small and medium-sized enterprise) to the state development bank of your federal state. It is important to note that you must submit the application before starting your project; however, processing is usually very fast.

d. Start-up scholarships for strong and innovative business ideas

Most start-up scholarships are aimed at founders from universities. Your start-up should be based on a strong and innovative idea, often with a technological and/or scientific background. One of the best-known nationwide scholarships is the EXIST founders scholarship.

3. Subsidized loans for founders from KfW or regional investment banks

The Kreditanstalt für Wiederaufbau (KfW) is one of the most well-known institutions when it comes to financing founders. The KfW offers various funding programs for founders that can be used both for start-ups and for existing companies.

In addition, each federal state has regional investment banks that offer loan programs tailored to your needs. Whether you are seeking financing from the KfW or a regional investment bank, your first point of contact is usually your house bank, as it reviews your application. This is known as the "house bank principle".

Next, let us take a look at the most well-known programs offered by the KfW:

3.1. ERP Founders Loan Start-up Money for founders and young companies

This program is specifically designed to support new entrepreneurs, including self-employed people (freelancers), business successors, young companies, and small businesses. The program allows loans of up to 125,000 euros, with up to 50,000 euros earmarked specifically for operating expenses. It is possible to apply for the loan multiple times until the maximum amount of 125,000 euros is reached. Entrepreneurs can receive 100% of the requested loan amount upon approval, and team founders can each apply individually for up to 125,000 euros.

The repayment terms for the loan are flexible, with a phase of interest-only payments followed by equal monthly installments of interest and principal. Entrepreneurs can repay the loan in full or in part early, but must pay a prepayment penalty.

It is important to know that borrowers are personally responsible for repaying the loan and are liable for outstanding amounts. Repayment is made through the borrower's bank.

3.2. ERP Founders Loan Universal

The ERP Founders Loan Universal is a loan program for larger business projects and can provide up to 25 million euros in financing. The repayment period is up to 20 years, with the first 3 years being repayment-free, meaning no repayments of the loan amount are required during that time.

This loan program offers favorable interest rates and can be used to purchase equipment, machinery, or anything you need to run your business. Companies with no more than 250 employees and an annual turnover of a maximum of 50 million euros or 43 million euros in total assets can apply for this program.

4. Micro-mezzanine and microloans as alternative financing options for startups

4.1. Micro-Mezzanine Funds

Mezzanine capital is a hybrid form of capital that combines elements of equity and loans. Micro-mezzanine funds, which offer small-volume investments in start-ups, fall into this category. These funds are particularly attractive to young companies because they have less stringent requirements than traditional bank loans and can provide up to 50,000 € in a combination of loan and equity.

This type of financing can improve a company's creditworthiness and create new financing opportunities. It offers a flexible and long-term financing solution, generally lasting between 3 and 10 years, without requiring collateral or a personal guarantee.

Another advantage is that micro-mezzanine funds offer not only financial support but also consulting and networking opportunities. They are structured as subordinated loans or silent participations, allowing the investor to share in the company's success without having control over its management.

Im Austausch für die Finanzierung erhält der Investor üblicherweise einen Prozentsatz der zukünftigen Gewinne des Unternehmens und eine Option, das Darlehen später in Eigenkapital umzuwandeln. Für weitere Informationen und zur Einreichung einer Anfrage für einen Fonds besuchen Sie Mikromezzaninfonds Deutschland.

4.2. Features and benefits of microloans

Microloans on the other hand are small loans particularly suitable for founders with low capital requirements. The advantage of microloans is that they are often available quickly, as their processing takes little time, involves non-bureaucratic application procedures, and requires a lower credit rating than other types of loan. However, interest rates may be higher than for traditional loans.

Microloans are generally limited to amounts between 1,000 and 20,000 euros and can therefore be ideal for financing smaller purchases or as a bridging loan in the start-up phase.

5. Business angels as a source of financing

In addition to government funding, private investors also support founders. These include business angels, who invest their capital and experience particularly in young companies. Business angels are usually experienced entrepreneurs or managers who not only provide financial support but also contribute valuable know-how and their network. They often look for promising business ideas they believe in and potentially profitable companies. It is therefore especially important to make a good impression and present a convincing concept.

Finding the right Business Angel

Um einen passenden Business Angel zu finden, können Gründer Netzwerke wie den Bundesverband Deutscher Business Angels (BAND) nutzen oder regionale Business Angel Netzwerke. Es ist wichtig, einen Business Angel zu finden, der nicht nur finanziell, sondern auch fachlich und persönlich zum Start-up passt, um eine erfolgreiche Zusammenarbeit sicherzustellen.

6. Crowdfunding models and how they work

Crowdfunding is an alternative financing method in which multiple people invest jointly in a project or business. This form of financing has become especially popular in recent years and can be an interesting option for startups seeking capital.

There are various crowdfunding models, such as reward-based crowdfunding, in which supporters purchase products or services in advance, or equity-based crowdfunding, in which investors take a stake in the company and receive shares in the company's capital in return.

Crowdfunding is particularly suitable for innovative projects or products that appeal to a broad target group. The successful implementation of a crowdfunding campaign can not only generate financial resources but also increase the visibility of the start-up and provide valuable feedback from the community.

The advantage of crowdfunding is that even unusual or risky projects can be financed that might not have had a chance with banks or investors.

7. Conclusion

Starting your own business can be facilitated by numerous government funding opportunities. KfW loans, micro-mezzanine funds, microloans, startup grants, business angels, and crowdfunding are just a few examples. To find the right funding option for your business, it is important to filter the various programs available based on criteria such as company size, region, business stage, age, funding purpose, funding amount, type of funding, specific sectors, and target groups.

Hier können Sie selbst nach verschiedenen Förderprogrammen recherchieren oder Unterstützung von Beratungsdiensten in Anspruch nehmen, um die beste Option für sich auszuwählen. Eine fundierte Entscheidung ist wichtig, denn Förderung bietet nicht nur finanzielle Unterstützung, sondern hilft auch beim Aufbau von Netzwerken, bringt wertvolle Kontakte und vermittelt wertvolles Know-how.