Financing a start-up, which alternatives are the most suitable?
In many cases, financing a start-up is the most complex process when starting a project of this type. There are several alternatives, but it is necessary to know the scope and implications of each decision.
What is a startup
A startup is a young technology-based company, characterised by its high growth potential and scalable business model.
These companies seek to exploit innovative market niches and offer disruptive solutions.
The nature of a startup is its agility and adaptability, differentiating it from traditional companies by its ability to scale quickly and its focus on constant innovation.
To create a startup in Spain, the initial steps include defining a clear and viable business idea, conducting market research and drawing up a detailed business plan.
It is essential to determine the legal structure of the company, commonly as a limited company for its flexibility and limited liability.
Next, the company must be registered in the Mercantile Register, obtain a VAT number and register with the Social Security and Tax Authorities.
If you are interested in knowing in detail how to create a start-up in Spain, you can learn more about the process in this link.
Alternatives and ideas for financing a start-up
Raising capital is essential to develop the product, enter the market and scale the business.
There are multiple routes to funding, each with its advantages and disadvantages, depending on the stage of development of the startup and the nature of the business.
Below, we look at the main avenues of funding for a startup:
- Self-financing or bootstrapping: This consists of financing the project with its own resources, thus avoiding getting into debt or ceding part of the control to third parties. This can include personal savings, sale of assets or reinvestment of the company’s own profits.
- Friends and family: Often, entrepreneurs resort to loans or investments from people close to them who believe in the project and are willing to support it financially.
- Bank loans: Obtain loans from banks or financial institutions. It requires a good business plan and, frequently, guarantees.
- Government grants and subsidies: Some governments, whether at state or regional level, offer financial support, subsidies or tax incentives to encourage innovation and entrepreneurship.
- Crowdfunding: Use of online platforms to raise small amounts of money from a large number of people. This method not only provides funding, but also validates the business idea to a wide audience.
- Venture Capital (VC): Investment funds that provide large amounts of money to startups with high growth potential. In return, they often require a significant stake in the business and board positions.
- Incubators and accelerators: Programmes that offer not only funding, but also office space, mentoring and access to a network of contacts. They are designed to help early-stage start-ups develop quickly.
- P2P (Peer to Peer) lending: Platforms that allow borrowing directly from other investors, cutting out financial institutions as intermediaries.
- Corporate fairs and entrepreneurship competitions: Participating in these events can provide not only funding, but also visibility and feedback on the business plan.
- Tokenisation: For technology-based startups, especially those related to blockchain, selling tokens can be an innovative way to raise funds.
The tax burden related to start-up financingThe tax burden related to start-up financing
In Spain, the payment of taxes during the early stages of a start-up’s formation can significantly influence the decision of entrepreneurs and investors.
Currently, there are several tax incentives aimed at encouraging investment in start-ups, for example, private investors can benefit from reductions in Personal Income Tax (IRPF) for investment in start-ups, with a limit established in the current legislation.
In addition, start-ups can benefit from reduced corporate income tax rates during the first years after incorporation, provided they meet certain requirements, such as not exceeding certain turnover limits.
There are also deductions for R&D&I activities that may be particularly relevant for technology start-ups.
However, despite these incentives, the administrative burden and complexity of the tax system can be a challenge.
It is important that startups take appropriate advice to maximise the tax benefits available and minimise their overall tax burden, both in the short and long term.
Tax and financial planning is crucial to take full advantage of the incentives offered and to sustain business growth in the competitive Spanish market.
At Asesoría Orihuela Costa we offer you the best advice, with a financial and tax team specialised in the creation of start ups from their initial stages.
If you have a project and want to protect it, contact our team and boost your business from the beginning.
