What are the main sources of finance for a company wanting to set up in Spain?

    Basically, there are two general types of finance: public and private.

    Public finance covers a wide variety of instruments that provide support and incentives for investment. They range from non-repayable subsidies, which involve no requirement whatsoever for the return of the funds that are received, to equity investments, equity loans and credits and loans, which have a limited duration and are subject to a requirement for the return of the funds received on completion of the established term, sometimes with the payment of interest. For further information, please see the section on incentives and aid.

    Private financing sources includes bank finance, basically lines of credit and loans; however, there are also other financial products, such as leasing, renting, factoring, payment facilities from suppliers or creditors, etc., which also correspond to this section. As alternatives to bank finance, there are mutual guarantee schemes and venture capital companies or the issue of shares or debts on capital markets.

Last updated: 20|02|2015

What is the most common source of external finance for SMEs?

    The most common source of external finance for most small and medium-sized enterprises in Europe is the bank loan. The use of and/or access to this source varies in each state according to the level of relations between the enterprises and banks, the extent to which internal finance is used and the structure of the banking sector. We refer to a 'loan agreement' when the bank provides the client with a quantity of money and the latter undertakes to return said quantity at the end of an established term, together with the interest that has accrued.

    When applying for a loan, care must be taken with three basic factors: the interest rate, the term of repayment and the grace period (during which the capital is not repaid).

Last updated: 21|08|2013

Loan or credit?

    Depending on the use that is to be given to the funds, one option will be more appropriate than the other. A loan transaction is for financing fixed assets or projects of a long duration in the company and in terms of time. If the need is for liquidity to counter cash account imbalances, the best option is a credit policy. Furthermore, one should bear in mind that a small part of any company's needs for liquidity is constant. Therefore, it is recommendable for a certain percentage of said needs for working capital to be financed in the long term by the company's equity or third-party resources.

    The term during which the policy can be used is normally limited and ranges from a few months to several years. This means that, when it matures, we must cover any outstanding balance immediately by either renewing the policy, using the company's equity, or refinancing the outstanding balance with a loan. The last case is very common when the policy has been mismanaged and the available balance has been used to finance fixed assets, which usually means that it has an outstanding balance from then until maturity and that it is not at all easy to cancel.

Last updated: 21|08|2013

Loan or leasing?

    Leasing is used to finance the equipment and material required by the company. It consists of renting the goods from the company in exchange for a periodical royalty. The material is also subject to a purchase option. It helps set up a company with limited cash payments.

    The decision between a loan and leasing is considered as a system for savings on taxes, since, according to current tax legislation, leasing allows the acceleration of the speed at which the asset that is required depreciates and, in the short term, this leads to tax benefits. However, one should take into account that, depending on the depreciation system that is chosen for the leasing, the real tax depreciation speed may be slower than in theory. We must also be aware that, to take advantage of a greater depreciation speed, we must be able to integrate the amount that is repaid into a positive amount that is subject to corporate tax. Consequently, the forecasts for profits for the next three years must be high enough to absorb the allocations for depreciation that are made without leading to tax losses. Finally, we must also take into consideration that we can achieve said effect by using non-linear fiscal depreciation systems, such as depreciation via the constant coefficient or sum-of-years’ digits system.

Last updated: 21|08|2013

What is and what benefits are there in factoring?

    This is the conveyance to a specialised company (this can also be a bank) of short-term commercial credits or invoices. The insolvency risk is then assumed by said company, called the 'factor', in exchange for a commission. It is normally used to guarantee the collection of foreign trade transactions.

    It reduces pressure on the working capital of expanding companies, improving cash flows and reducing the credit control load; however, it is not recommendable for companies with small-scale clienteles or complex payment models. Furthermore, it is sometimes seen as a last resource for companies in difficult situations.

Last updated: 21|08|2013

When is renting useful?

    Companies that need to change their equipment on a regular basis can also benefit from this system. Computer equipment and vehicles are often financed in this way. It consists of renting the asset in question for a specific term and, on the completion of said term, it is returned and exchanged for a new one.

Last updated: 21|08|2013

How does a mutual guarantee scheme work?

    It guarantees the short- and mid-term financial transactions of the companies in the scheme

Last updated: 21|08|2013

What is a business angel?

    A business angel is an individual with extensive knowledge about an industry or economic sector (business owner, company executive, successful saver or entrepreneur) with sufficient financial capacity for making private investments in start-ups or entrepreneurial business projects by contributing with 'smart capital': financial resources, his/her technical know-how and network of personal contacts, even though they do not take part in the project management as executives.

    Their investments are usually made in entrepreneurs who want to start up a business project (seed capital) and companies that are starting their activities (start-up or development capital). They have sufficient financial capacity for making investments of between €25,000 and €500,000, usually acquiring 25% of the capital in exchange for an investment horizon of 1 to 3 years.

    These investors usually join together to form the so-called business angels networks, which provide them with information about projects and events, contact with entrepreneurs and other investors, the organisation of meetings and consultancy services, etc., and they have become an essential element for developing the unofficial finance market in Spain and Europe. Further information at: (Asociación Española de Business Angels Networks, Spanish Association of Business Angels Networks).

Last updated: 21|08|2013

What is venture capital and in what way does it differ from business angels?

    Venture capital (VC) is a form of financing for businesses and entrepreneurs at early stages of development and covers the start-up (seed capital) and the initial stage of development (early stage) and expansion (later stage). Unlike business angels, venture capital companies provide professional management of third-party funds.

    The investment range of a venture capital company is greater than that of a business angel. It varies between €1 million and €2 million per transaction and involves the acquisition of a significant stake in the company's capital. However, it is often increased when the start-up moves into new stages of development and growth.

    The time horizon of the investment is between 3 and 7 years and, like business Angels, it focuses mainly on rigorous due diligence processes before investing in the companies in order to minimise the risk inherent to this type of investment. They also take an active part in the management of the start-up by including a representative in the management team. Further information at (Asociación Española de Entidades de Capital Riesgo, Spanish Association of Venture Capital Companies).

Last updated: 21|08|2013

What is the most appropriate finance model for innovation?

    The European Observatory for SMEs suggests that the most appropriate model is usually a stake in the share capital; however, in later stages of development of the company, it may be interesting to combine shareequity -debt and guarantee instruments. In this way, the risks associated with innovation would suggest a finance model based on venture capital, at least during the initial stages. It may be appropriate to include public sources of finance, especially during the initial stages of development of the project.

Last updated: 21|08|2013

What specific difficulties and needs need to be considered when financing innovation?

    During innovation processes, expenses are normally quite high, whereas income is minimal or non-existent. Another difficulty associated with obtaining finance for innovation is the absence of tangible assets that can be used as a subsidiary guarantee of the loan. In this context, the share capital situation must be sound in order to cover the void until revenue can be obtained. A strong share capital will make it possible to obtain finance at later stages through bank debts.

    In any case, the EU has placed priority on the supply of venture capital for financing innovation and the launch of initiatives that fill the void, especially in finance through share capital during the initial stages. The outlook in this area is very positive.

Last updated: 21|08|2013

How can I use public support to develop my company?

    Although, in principle, the problems associated with choosing a 'subsidy culture' are usually seen as an obstacle in comparison with what could be called an 'entrepreneurial culture', it must be pointed out that there is not always sufficient knowledge of the options available to an entrepreneur regarding this channel for aid and, in many circumstances, they may be decisive for his/her project. Whatever the case, subsidies should never be considered as the only resource for the entrepreneur and basing a project on subsidies is a grave mistake.

    Furthermore, certain factors need to be taken into consideration when choosing public subsidies: the effort to remain informed about the offer of subsidies, a detailed explanation of the project when the application is submitted and drawing up plans that take into account the fact that the subsidy may not be available immediately after it has been awarded.

Last updated: 21|08|2013

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