Official loans, grants and subsidies will usually be accorded only if the entrepreneur shows they have obtained, are going to obtain or have at least tried to obtain other funds from personal/private and commercial sources.

PRIVATE FUNDS

Depending on the business structure selected and the protection it offers personal estate, the entrepreneur should calculate how much of their own money they are prepared to invest, and possibly lose, if the business is unsuccessful. Family, friends, associates and banks will need to have proof of personal commitment before risking their funds. Banks (see page 96) will normally look for at least 30 per cent of initial funds coming from private sources before considering a loan.

Entrepreneurs in France in the under-30 age group on average invest under 7,500€ from personal sources in new businesses, while the over-30 age group invest on average around 15,000€. Three out of four new businesses in France start up thanks to gifts and loans from family and close friends. Formal agreements should, of course, be drawn up stating amounts invested, plus repayment and dividend conditions, and registered with the tax office before the 15th of February of the following year so that the funds are not considered as income.

Since 2005, family gifts of up to 30,000€ to help start a new business – and also to help buy an existing business – are exempt from gift tax. (Buyers of businesses also qualify for a reduction on IR tax of up to 5,000€ a year.) And anyone (personne physique) investing in a new company which is not on the stock exchange benefits from 25 per cent tax relief on the amount invested, up to an investment amount of approximately 20,000€. If the company fails within the first eight years, investors may also be entitled to deduct the amount lost from their income returns to the tax authorities. The tax office will confirm the exact maximum limits allowed. Married couples are entitled to twice the single person allowances.

Below are outlined some of the various savings plans that exist which can help finance business creations.

Le livret d’épargne d’entreprise (LEE)

This plan runs from two to five years and a reduced rate loan, which is not automatically agreed, may be taken out against it for a two- to 15–year period. Not all banks propose this plan and you should bear this in mind if a bank account in France is being opened for the first time. A minimum initial deposit of 750€ is necessary followed by regular amounts totalling at least 540€ a year during the plan’s life. The limit to total savings is 45,800€ and interest is attracted at a rate of around 5 per cent tax-free. Withdrawals can now be made before the two-year period is reached provided the funds are used within six months to help finance a new business being created by the plan holder or a member of his immediate family.

Le plan d’épargne en actions (PEA)

Withdrawals from this stock portfolio investment plan, which was originally designed as a personal investment plan of at least eight years, can now be made, tax-free, before five years are up to help finance a new business. The funds must be deposited in a bank account for the business within three months.

Le plan d’épargne logement (PEL)

This is the equivalent of a building society’s savings plan, and it can now be used to buy business premises provided that they are also going to be the plan holder’s main home.

BANKS

Shopping around for bank loans is recommended. It doesn’t follow that the bank that has been used for personal loans for domestic or property purchases (prêts à la consommation or prêts immobiliers) and manages your personal account will offer loans to help start a small- or medium-sized business. A useful website is www.FinancePME.com as it provides a free service (the banks sponsor the website) to find the most advantageous loan deal for new businesses, according to individual circumstances and requirements. Large banks are more interested in big business, and if they are ready to consider a loan may take a long time to decide. (Barclays Bank, for example, have been in France for nearly a century now, and offer mortgages, personal banking and stock exchange investment services, but they do not solicit the small-business loans market.) A local bank that already knows the entrepreneur and can be easily visited to build up a long-term relationship is the ideal solution. Most banks with local offices will have a separate division for entrepreneurs, and standard banking conditions for entrepreneurs and professionnels setting up as Eh. Although interviews will usually be by appointment it is worth checking banking hours when shopping around. The 35–hour week means that many banks are closed on Mondays or on Saturday afternoons or that experienced staff, who are familiar with the area’s business environment, may have some time off during the week.

Standard banking conditions will include charges for:

• overdrafts, to cover cash-flow problems after the first 12 months and not to provide initial finance. Overdrafts must be agreed in advance;
• commission for crediting accounts immediately with the value of a customer’s draft (traite) with a payment date of up to 90 days, although any unsettled invoices corresponding to drafts still remain the account holder’s risk. This is not the same as using a factoring company which takes over non-payment risk;
• cheque negotiation fees for non-euro cheques.

They should not include charges for writing out cheques and for cash deposits and withdrawals as a mutual agreement between banks for these free-banking services was drawn up in 2004. However, it is worth checking this if a new bank account is being opened as not all banks respect this agreement.

Classic bank loans are medium- to long-term. Banks will require firm personal guarantees to cover loans, especially if no guarantees are provided by any state or regional-development aid. Guarantees may be a charge against business material and equipment, property, personal estate or a third-party who signs an acte de caution.

The principal bank loans available are outlined below.

Les prêts bancaires aux entreprises (prêts CODEVI)

These medium- to long-term loans cost around five per cent and are available, subject to a favourable decision, to all PME businesses with a turnover not exceeding 76,000,000€.

Le prêt à la création d’entreprise (PCE)

No collateral is required for this loan which may be granted to new businesses or businesses under three years’ old and companies with private shareholders that employ no more than 10 people. It is aimed at small projects as the loan ranges from 2,000 to a maximum of 7,000€. It is for a fixed five-year period, with the first of 54 monthly repayments starting after six months into the loan. The interest rate is around 6 per cent. No existing or previous bank loans must have been agreed for the business project, but a medium- to long-term bank loan must be established to accompany it. The bank loan must be between two to three times the PCE amount. The banque de développement des petites et moyennes entreprises (BDPME) which provides finance for small- and medium-sized businesses issues these loans and can also underwrite other bank loans. Visit their website www.bdpme.fr for full details and conditions.

Les prêts bonifiés à I’artisanat

Any business registered at a Chambre des Métiers is entitled to apply for this ‘improvement’ loan, from a bank, such as the Banque Populaire, BNP, Crédit Agricole, Crédit Mutuel, Crédit Lyonnais and Société Générale, for installation or improvement of equipment bringing it into line with safety, hygiene and environmental regulations. The interest rate is around 6 per cent for a loan of not more than 46,000€, representing up to 80 per cent HT of the cost. HT is the amount exclusive of VAT (TVA). Loans are between two and 15 years and come from state funds allocated to the banks which decide if loan applications meet the required conditions.

VENTURE CAPITAL

Commercial organisations providing venture capital and minor shareholdings – not to be confused with major shareholders helping the long-term development of the business will be looking for businesses with outstanding rapid development potential so that funds invested will have maximum return over the shortest possible period.

National organisations are only interested in large projects and, in particular, those which break new technological ground or offer a quite revolutionary product. Any project, asking for less than 150,000€ venture capital is unlikely to even be considered. There are also regional organisations (Sociétés de développement regional (SDR)), geared to investing funds in projects which must have a regional interest, for example a new private transport service for the regional community. Here again only large projects will be considered, seeking at least 75,000€ venture capital.

Local organisations, however, exist in certain areas which may provide venture capital upwards from 7,500€ for new small- and medium-sized businesses of all types, with industry and services to businesses more likely to attract investment than new technology businesses. The local Chamber of Commerce should have an up-to-date list. For the Paris area, a useful starting point is the Ile-de-France Développement website: www.idfd.fr.

Venture capital ‘clubs’ have a different philosophy. They consist of small groups of individuals who want to make a social statement by investing in small businesses providing a product or service in the local community’s interest or promising to provide some local employment. As with any venture-capital investor the project will be carefully studied, especially as investors will be risking their own money. Investments are usually made for about five years for amounts between 1,500 and 5,000€. One of the main chain of clubs is CIGALES (clubs d’investisseurs pour une gestion alternative et locale de I’épargne). Visit www.cigales.asso.fr for more information on their approximately 80 branches throughout France. Note that applications should in the first instance be addressed to the federation’s head office: CIGALES, 61, rue Victor Hugo, 93500 Pantin.

Moving up the ‘club’ ladder in investment amounts is the association Fédération Love Money which has an estimated 20 branches. Each branch is a non-profit-making association subject to the 1901 law (hi 1901) setting out association rules and regulations. They collect individual members’ contributions which total not less than 50,000€ as investment capital in an SA company. (SAs - see Chapter 3 – must have at least 37,000€ capital.) All business projects, seeking sufficient capital can be considered. The Federation’s Love is altruistic as the association’s are non-profit making. Consult www.lovemoney.org for full details in English.

Business angels are exactly what they suggest: ‘heaven-sent’ private investors, who are probably retired or previous entrepreneurs, looking to invest in and give some of their spare time to help new small businesses. The number of angels is growing fast in France, although still a long way behind the UK. Investors are encouraged by certain tax-deductible allowances on their investments in company structures provided that they (the investors) have set themselves up officially as an individual venture capital business (société unipersonnnelle à risqué (SUIR)) and invest in industrial, commercial or artisan company structures. New companies in these sorts of businesses and looking for investment funds of around 7,500€ should visit www.franceangels.org.

LEASING (CRÉDIT-BAIL)

Often used for acquiring business, and private, vehicles on a hire basis, with an option to buy for a small residual amount at the end of the contract, leasing can also be used to buy business premises (over a certain value) or capital equipment. No initial outlay is required. In the case of property, moreover, loans (crédit-bail immobilier) can be up to 20 years if required, a period rarely accorded by banks. All lease repayments are tax-deductible.

Particular points and clauses to watch out for in this form of contract are:

• Does the contract provide options to continue leasing the same material at a reduced rate or to return it, as well as the option-to-buy upon completion of the lease agreement?
• If the business fails during the period of contract, would the supplier (the finance house, as they actually own the material) recover it and cancel the contract?
• Is the monthly repayment amount fixed or degressive? (It should certainly not increase.)
• Does the contract call for a personal guarantee? Consider taking out insurance to cover this, instead of jeopardising personal properly.

The customer copy of the contract application form should also contain a seven-day cancellation period possibility which must be signed and sent off within that period if there is a change of heart.

USEFUL VOCABULARY

USEFUL ADDRESSES AND WEBSITES

L’association nationale de capitale de proximité

ANCP-Epicea, 7, rue Domrémy, 75013 Paris

Visit www.eficea.org

Publishes a guide to all organisations offering finance to businesses operating locally.

L’association française des investisseurs en capital

AFIC, 14, rue de Berri, 75008 Paris.

Visit www.afic.asso.fr

The association of capital investment organisations.

L’Union nationale des investisseurs en capital pour les entreprises régionales

Visit www.unicer.asso.fr

National group of venture capital companies which invest in regional developing companies.