In addition to investing own money, grants, crowdfunding and sponsorhips to fund your ideas you could also consider a loan. Below a list of loans available to your projects in the Netherlands: cultural loans, subordinated loans and venture capital, bank financing and participation.
Loans between private persons
To a loan between an entrepreneur and a private person, often friends or family, are some rules attached. For example you have to apply a competitive interest rate, to avoid the Tax Authorities to register your loan as a gift. Write down all your commitments in a loan agreement. For more information visit the website of the Tax Authorities (Belastingdienst).
The culture loans (cultuurleningen) by the Fund Cultuur+Financiering are for creative entrepreneurs. The fund provides different types of loans from a minimum of € 1,000 euro to a maximum of € 500,000 euro. They also offer favorable conditions, such as an interest rate of 1%. In the absence of financial security, the fund can help you with bank guarantees.
Investing personal capital, your own money, makes you less dependent upon financial contributions from others. 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? 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.
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.