Businesses in Germany need capital in all sorts of situations. Solid financing is necessary right from the start in order to make initial investments, cover ongoing costs, and successfully navigate the market entry phase. As a business grows, so does its need for capital—to finance things like expansion plans and projects, or to bridge liquidity gaps.

There are a range of financing options to help businesses in Germany meet these needs. This article will tell you what those financing options are and how you can choose the one that's right for your business.

What’s in this article?

• What types of financing are available to businesses in Germany?
  
• What are the advantages and disadvantages of bank loans and government-subsidized loans?
  
• What situations are special types of financing best suited to?
  
• How do you choose the right type of financing?
  

What types of financing are available to businesses in Germany?

Depending on their stage of development, capital requirements, and risk profile, German businesses have a variety of financing options. Generally speaking, there are two primary categories of financing: internal versus external financing and equity versus debt financing. These differentiations form the basis for understanding the individual financing types.

Internal financing refers to types of financing where the capital is provided either by shareholders or the company itself. External financing, on the other hand, is when a business obtains capital from outside parties, such as banks, investors, or other financing partners.

In addition, a distinction is made between whether the capital is provided to the company as equity or debt. Equity financing strengthens a business’s equity base. While there is no obligation to repay equity financing, businesses frequently offer voting rights or company shares in return. With debt financing, the business raises capital that comes with a clear repayment obligation and, usually, fixed interest and repayment plans.

Financing types at a glance

Internal financing with equity capital

• Self-financing (profit retention): Profits are retained within the business and are used for investments or to solidify the equity base.
  
• Private contributions: Shareholders or sole proprietors contribute additional equity to the business using their private assets.
  
• In-kind contributions: Instead of cash, shareholders can also contribute real estate, machinery, or other assets the business requires as equity capital.
  
• Capital increase: Businesses raise capital by issuing stock or shares.
  
• Depreciation financing: Funds released through depreciation are temporarily available for financing purposes.
  

Internal financing with debt capital

• Provision financing: The creation of provisions leads to debt-like obligations that are only paid out later and provide the company with internal liquidity until then.
  
• Asset restructuring: The sale of nonessential assets releases tied-up capital.
  

External financing with equity capital

• Equity financing: External investors acquire stakes in the business, providing capital in return for shares.
  
• Venture capital: Venture capital firms provide capital to high-growth businesses, often in their early stages of development, assuming a higher level of risk in the process.
  
• Private equity: Private equity firms invest equity capital in established companies and often exert strategic influence on management or corporate development.
  
• Equity crowdfunding: A number of private investors contribute equity or equity-like funding via online platforms.
  

External financing with debt capital

• Bank loans: Banks provide businesses with traditional loans with fixed terms, interest rates, and repayment schedules.
  
• Public development loans: Government development institutions, such as the Credit Institute for Reconstruction (KfW), lend to businesses on favorable terms and frequently offer indemnities.
  
• Bonds: Businesses issue fixed-interest securities on the capital market as a way of raising larger sums from investors, committing to pay back the bonds after a specified period.
  
• Supplier credits: Suppliers grant businesses payment terms that provide for short-term liquidity.
  

Special and hybrid financing types

• Mezzanine financing: Businesses receive mezzanine capital as a mix of equity and debt capital, which is usually subordinated, treated as equity on the balance sheet, and does not confer voting rights.
  
• Leasing: Businesses use lease agreements in order to use machinery, vehicles, or IT systems without having to actually purchase them.
  
• Factoring: Businesses sell their outstanding accounts receivable (AR) to a factor as a way of obtaining instant liquidity and outsourcing AR management.
  
• Revenue-based financing: Businesses receive capital that they repay flexibly, with repayments tied to actual sales.
  
• Embedded lending: Businesses receive loans directly through digital platforms. They can use these loans immediately for purchases or services on the platform.
  
• Crowdfunding: Businesses finance specific projects or ventures by having many individual investors provide capital through online platforms.
  

What are the advantages and disadvantages of bank loans and government-subsidized loans?

Two of the most common ways for businesses in Germany to raise capital are bank loans and government-backed development loans. Both of these external financing types come with upsides and downsides that should be given careful consideration beforehand.

Bank loans give businesses the flexibility to finance investments or short-term liquidity gaps. They’re characterized by predictable repayment terms and clear contractual conditions. However, bank loans are usually contingent on providing collateral and undergoing credit checks. This can be a major hurdle for young businesses, in particular, as well as for businesses with a higher risk profile. Additionally, interest payments and repayment schedules create ongoing financial obligations that can strain liquidity.

Government-backed development loans (sometimes also referred to as promotional loans), such as the ones offered through KfW programs, often come with particularly favorable conditions, longer repayment terms and, sometimes, indemnities. One of the potential downsides is that these loans can be earmarked for specific purposes or project types, or tied to specific conditions, meaning businesses don’t have complete freedom in how they use the funds. The application process also tends to be a bureaucracy-laden affair.

In general, bank loans are mostly suitable for businesses with a stable credit rating and short-term financing needs, while subsidized loans primarily support investments with long planning horizons or innovative projects. Making an informed financing decision is therefore all about carefully weighing costs, flexibility, risks, and impact on liquidity.

What situations are special types of financing best suited to?

With rising interest rates, strict credit checks, and lengthy approval processes, businesses in Germany are increasingly looking for sources of capital beyond traditional bank loans and government loans. Below, we walk you through four alternative financing solutions.

Leasing

Instead of purchasing new machinery, vehicles, or office or IT equipment, businesses can use these tools through lease agreements. They pay regular installments for use of the equipment without having to raise the capital to buy it outright. Not only does this protect a business’s liquidity, it also has a positive impact on its balance sheet, as property leases are not generally treated as property purchases on the books.

Another advantage to leasing is flexibility: at the end of the lease term, companies can return, exchange, or purchase the equipment—meaning they can stay technologically up-to-date without having to tie up large sums of money in long-term investments. Leasing is also often tax-efficient, as lease payments can be deducted as business expenses.

Leasing makes sense:

• For businesses that are in need of major investment, but have limited liquidity or restricted equity
  
• If businesses regularly require modernized equipment or state-of-the-art technology
  
• For industries where equipment becomes worn-out or outdated fast, such as manufacturing, hospitality, logistics, or IT
  
• If businesses want to reduce their balance sheet liabilities or prefer to use investment funds elsewhere
  

Factoring

In factoring, businesses sell their outstanding invoices to a specialized financial institution, known as a factor. This factor pays the invoice total, less a fee, to the business directly, and in return takes care of collecting the outstanding AR. The risk of default, therefore, transfers to the factor. The extent of the risk transfer depends on the type of factoring selected.

Factoring makes sense:

• If businesses need short-term liquidity, e.g., to cover ongoing costs or investments
  
• If businesses grant their customers longer payment terms, but still want predictable revenue
  
• For small and medium-sized enterprises that don’t have sufficient resources for AR management
  

Revenue-based financing

With revenue-based financing, businesses receive capital based on their income. Repayments are made as a percentage of actual revenue, rising and falling in line with the business’s earnings. This flexibility eases the strain on liquidity, as businesses don’t have to make fixed payments regardless of how business is going.

Stripe Capital offers revenue-based financing. Businesses can get a loan or merchant cash advance in just a few minutes, without the applications or collateral associated with traditional bank loans. They can also say goodbye to the lengthy processes that are often associated with bank loans or government-backed loans.

Revenue-based financing makes sense:

• If businesses want to maintain flexible liquidity and link payment obligations to actual revenue
  
• If businesses need short-term capital but don’t have sufficient collateral to get a traditional bank loan
  
• If revenue fluctuates seasonally or is heavily dependent on sales
  
• For founders and growing businesses looking to react quickly to market opportunities
  

Embedded lending

Embedded lending refers to the integration of loan offers directly into platforms or applications that are not primarily designed for financial services. It allows businesses to access financing solutions without having to leave the platform or go through separate application processes. Loans are granted in real time using data already available within the platform, such as user behavior or previous transactions. Once approved, the funds are made available instantly or are released directly for specific on-platform purposes, such as purchases or services. Repayments are flexible and managed via the platform—often debited automatically from linked accounts.

Embedded lending makes sense:

• If capital is going to be used directly for transactions or investments within a platform
  
• For businesses looking to leverage existing platform data to speed up credit checks
  
• If businesses need quick, hassle-free access to funds
  

How do you choose the right type of financing?

The choice of financing method depends heavily on the individual needs of the business. It helps here to differentiate between internal and external financing, as well as between equity and debt financing. As a rule, entrepreneurs need to think about which goals they want to prioritize.

Priority: Liquidity vs. ownership

When businesses need capital quickly and do not want to give up shares or voting rights, external financing options such as bank loans, development loans, or revenue-based financing are the most viable options. These financing types boost liquidity; however, they also establish fixed repayment obligations and put a strain on your balance sheet. If business owners are willing to give up ownership stakes, then alternatives such as venture capital or private equity might be an option. These solidify the business’s equity base and don’t come with interest or repayments. They do, however, mean giving up some voting rights or giving outside parties strategic influence.

Priority: Flexibility vs. predictability

Businesses need to consider whether they prefer a financing option that flexes with their revenue or one that offers long-term predictability. Revenue-based financing models such as Stripe Capital allow for variable repayments, which can be beneficial for businesses whose earnings are hard to predict. Traditional bank loans and government-backed loans, on the other hand, offer fixed, predictable repayment terms. However, fixed repayment terms could become an issue for businesses if revenue declines and they still have to meet their debt obligations.

Priority: Short-term vs. long-term investments

For operating equipment or high-tech tools, a short-term financing model such as leasing is generally a good option. The capital is not tied up completely, and equipment, for example, can be regularly upgraded. For long-term expansion or strategy projects, on the other hand, capital increases, equity financing, or mezzanine financing are more suitable.

Combining financing options

The best solution is often a mix of different financing types. For example, a business can use internal financing to shore up its equity base, while using factoring to ensure short-term liquidity, and raising capital with solutions such as Stripe Capital. In this way, the company avoids giving up equity, secures its liquidity, and still has the flexibility to react to market opportunities through additional investments.