Types of financing
Many creatives invest a lot of their own time and money in their work. Especially at the start of their career. Below an overview of the different ways of financing.
Grants and subsidies
Your project may qualify for government grants or subsidies from cultural funds. Or you could obtain gifts from relatives, friends and companies. But none of these just give their money away; after all, it is "lost" to them forever. Subsidizing bodies, in particular, want to hear a convincing story in which you make it clear why they should support you, why now and why with the sum you are asking for. See also the section on Funding.
Personal gifts may be tax-exempt, but often they are not. For more information, consult a bank or the Netherlands Tax and Customs Administration (Belastingdienst).
Investments and loans
Culture loan (Cultuurlening), for example, enables artists to take out (micro) credits under a programme operated in partnership between Amsterdams Arts Fund, Cultuur-ondernemen and Triodos Bank. The Cultuurlening is not just a loan but a package with room for support and education. The aim of the loan is to invest in profitable projects.
InnovatiefondsMKB+ has € 500 million worth of innovation loans and venture capital. Entrepeneurs can get a loan with a minimum of €150.000. They will pay back the loan when they manage to sell their product, if they don't, the loan will become a fund.
Subordinated loans are ones which, in the event of bankruptcy, are repayable only once all other claims have been settled. They are often provided by investors who are prepared to accept a higher level of risk.
Investing personal capital, your own money, makes you less dependent upon financial contributions from others. That can give you a good feeling, but it is also required by many financiers. A bank, for example, will usually require 20% solvency. That means that one-fifth of the total sum you need must come from your own sources. As well as personal capital, they could be grants, subsidies and subordinated loans.
Even once you have raised personal capital, subordinated loans and subsidies, you may well need more funds. These have to be obtained in the commercial market, usually from banks.
You have two main options:
- A loan, or long-term credit, is often used to finance property and goods. One common form is the mortgage. A loan usually has a fixed repayment term: five years, say, for the purchase of moveable goods or 30 years for premises.
- An overdraft, or short-term credit, is generally used when finance is needed for only a limited period. For example, to cover current debts. You only pay interest on the amount actually borrowed, but this is often at a rate higher than for a fixed-term loan.
Forms of collateral
The bank first checks that your cashflow is sufficient to cover the credit being applied for: after deduction of costs and depreciation, do you have enough money coming in to make the repayments, including interest? It then determines whether there is adequate security: can it recover the money lent if, for example, you go bankrupt? In general, you need enough security – or collateral – to underwrite the full amount of the credit. If you do not, this is called undercoverage.
The following are acceptable to a bank as collateral:
- Mortgage; When financing property, it is usually mortgaged to the bank. In the event of bankruptcy, the bank can repossess the property and sell it.
- Lien; The bank secures a legal claim over moveable goods such as stock, tools or musical instruments.
- Guarantee; An individual or organization guarantees a certain amount of money on your behalf. If the bank decides to recover its money, the guarantor must pay back any amount you cannot cover yourself.
- Charging lien; This is a method used to secure an advance on future income. For example, if your clients have not paid you yet but you have to pay your suppliers now. A charging lien gives your bank a direct claim on your accounts receivable. In some cases, a bank may also be prepared to give you an advance on a subsidy that you have applied for but have yet to be awarded.
- Small-business guarantee; If you lack other forms of collateral, in certain cases the Department of Economic Affairs may back you with a small-business guarantee (MKB-garantie).
Participation financing involves an investor acquiring a stake in your business. It assumes some of the risk, but also shares in any profit. Participation often means the investor buying shares in your company.