8 Ways to Fund Your Veteran-Owned Startup
Believe it or not, the military does an excellent job in preparing veterans to start and run their own businesses. As veterans, we learn a lot of skills that are very important to being a successful entrepreneur:
In fact, in many cases, entrepreneurs have limited success or outright fail because they lack these skills.
But the military doesn’t teach us a lot about how business works. Most soldiers and veterans know very little about basic business fundamentals such as:
- Business Finance
- Equity/Debt Funding
The good news is you can learn business. It’s harder to be a business expert and have to learn leadership than the other way around.
When I talk with veterans about their business ideas, the same questions tend to come up over and over – which is good for two reasons: these veterans are thinking about the right questions, and I can help answer them.
But the number one question I get in almost every conversation is this:
How Do I Fund My Startup?
This was the number one question on my mind when I wanted to start my own company too. I knew I had a great business idea and wasn’t afraid of putting in lots of hard work. I just didn’t know how to get the money I needed to get going while still paying my mortgage and buying groceries.
Luckily, we live in a time when it is easier than ever to not only start a business but also to finance one. Better yet, we also live in a time when you can learn what you need to know when you need to know it, and we can find people who can help us more easily than ever.
Even better, as a veteran you have access to some resources and privileges that civilian entrepreneurs don’t.
Here are eight ways you can fund your startup idea. Ultimately your business model, experience, and a number of other factors will help you determine which combination of these are best for you. But this list should help you get thinking about how to take the next step.
**NOTE** The best source of funding is REVENUE. Keep your costs low and maximize your revenue so you can use your profits to finance your business growth.
#1: Business Credit Cards
7% of all small business financing comes from either personal or business credit cards. You can use your personal cards to finance your business early on, but ultimately you really want to use business credit.
Business credit is different than personal credit. You can have terrible personal credit, but if your business always pays its bills on time, you can begin to establish great business credit.
In order to establish a separate line of credit for your business and avoid personal liability for your business credit cards, you need to form a corporation (I recommend forming an LLC in your home state), register your business with credit bureaus (such as Duns & Bradstreet), and apply for the right types of business cards. Note that some banks market personal credit cards as “business cards” so be sure to look carefully at the terms to make sure you are not personally liable for the credit debt.
#2: Friends and Family Funding
Borrowing money from your friends and family is the second easiest funding source because it’s easier to establish credibility with people who know you well and they’d be more likely to help you out instead of a stranger asking for money.
You can raise friends and family money in two ways: debt or equity. Debt simply means you are borrowing money in the form of a loan, whereas equity means you’re selling a percentage of ownership in your company to them.
If you are borrowing money in the form of a loan – even if it’s from your parents – make sure to document the terms of the loan in the form of a promissory note. This document basically describes the terms of the loan, such as the amount borrowed, when and how it will be paid back, any interest due, etc. As your company grows and you pay back this loan, this will go a long way to proving to banks that you are credit-worthy for borrowing from institutions as well.
If you are selling a percentage of your company to a friend or family member, you need to incorporate your company (again, an LLC in your home state is best for now) and in 95% of cases you will want to hire a lawyer to set up all of the necessary documents. Make sure that you and your new part-owner both agree on the value of the company, the use of the money, and their percentage of ownership. Also make it clear (in writing) what voting rights and ability to direct the company both you and any other owners have.
#3: Business Loans
Banks, credit unions, and franchisors all lend money to small business and sometimes even to startup companies. Usually loans are secured by collateral – meaning the things you buy with the loan can be repossessed and resold by the bank in the case you default on the loan.
Most business loans come in the form of a Line of Credit, which can fluctuate in maximum borrowing amount based on some metrics of your company’s financial performance, like debt-to-equity, average accounts receivable, etc.
When looking for business loans, stick to conventional institutions such as banks and credit unions. Just like with personal pay-day loans, there are some sketchy companies online that lend you money with awful terms. So be careful with whom you do business.
You’ll need to be really buttoned down on your business plan, financial statements, and other legal documentation when you approach a bank. Banks assess risk in a number of ways including your personal credit history. It may be difficult to get a business loan for a startup company – especially if you won’t have a lot of physical collateral (like furniture and equipment).
The Small Business Administration (SBA) recently extended their Veterans Advantage program that waives the 3% SBA fee for loans made by lenders to veteran-owned small businesses. Veterans can borrow up to $350,000 without having to pay the SBA fee, which can save them up to $10,500 in fees.
#4: Equity Financing
If you’re starting a company that requires a significant amount of investment but can’t get the financing you need from credit, friends & family, or banks, you may want to consider raising equity funding.
When you raise equity financing you are selling shares of your company for a certain amount per share. For example, if your company is valued at $1,000,000 and you need to rise $100,000, you could sell 100,000 shares each valued at $1.00. If you sell 100,000 shares, you would have sold 10% of the ownership if your company.
You need a lawyer to help you do this. Trust me. There are a number of documents that have to be created and the angel investors may want to work with you and your lawyer to alter some of the terms and conditions of the equity sale.
The key to a successful equity raise is to know the value of your company. Investors will want to invest in something that provides a significant return, and entrepreneurs want to retain as much of their ownership as possible. Just remember this: pigs get fed and hogs get slaughtered. Work with your potential investors and your advisors/mentors to come up with a reasonable valuation.
I could write for hours about this topic. You can read more about my thoughts on raising equity at my website.
#5: Business Incubators
While only 44% of all businesses remain in business after 4 years, 87% of businesses that go through incubator programs are still in business after 10 years. That’s a pretty effective improvement in business reliability.
Incubators are like boot camp for business. These are programs that usually last from 2-6 months and provide a small company everything they need to get started. Legal, financial, marketing, employment, administration, and other forms of support are provided to the entrepreneur.
Most incubator programs provide a modest cash injection (anywhere from $5K to $250K on average) which is used by the founder to implement some of the things they learn in the incubator or pay for limited operational costs.
Capital Innovators provides $50K in funding and $50K in services to winners of a semi-annual competition to get into the program. Only 6 companies are accepted each 6-month period.
The VIP program provides all sorts of educational training for vetting ideas, concept development, financial forecasting, etc. along with various levels of cash (depending on the business needs).
A former employee of mine had a great idea for a new mobile app product, but needed some sort of funding to at least get started. He created a Kickstarter campaign (check out his campaign here) and raised more that $100K in the span of a few weeks.
Fundraising sites like Kickstarter, Indiegogo, and others allow small businesses to raise cash through pre-sales of products or selling special incentives like naming rights to a product or giveaways like T-Shirts.
A whole slew of other fundraising sites have sprung to life recently because of some recent changes to the laws that govern who can invest in a company. Normally to invest in a company you have to have a personal net worth of more than $1M and be registered as an investor. Now more people can invest in companies (the laws are still hazy so tread with caution here) through these fundraising sites.
I recommend taking a look at some of the more successful fundraising campaigns like this one to see what works and what doesn’t.
#7: Joint Venture Partnerships
Several years ago when I ran my first startup company, we were building a highly complex hardware/software device to sell to the military. We scraped together the first $750K through an equity raise, revenues from service sales, and a bank loan. This got us to our Minimum Viable Product (our prototype) but we needed several million dollars to go to production.
We were able to sign a Joint Venture Partnership (JVP) with a large defense contractor who provided more than $3M in capital to cover the costs of engineering, manufacturing, production, and distribution of the product.
In doing so we gave up naming rights and they put their logo on the box, but we couldn’t have built it without this partnership.
If you have a great big idea and know that it might be of interest to a larger company, consider approaching a few companies about a joint venture. You will definitely want a lawyer involved in negotiating these kinds of deals to protect yourself. A lot of JVPs end poorly, so you want to be prepared for a breakup even if you are head-over-heels in love in the honeymoon phase.
The key with a JVP like this is to retain as much creative, design, pricing and branding control as possible. The JVP you want would allow you to continue to control the development, marketing, and pivoting of the product as necessary without having the larger partner slow you down.
#8: Take over an existing business
Not a lot of people think about this as a way to become a small business owner. There are a lot of entrepreneurs out there who run successful small business but might be ready to retire and hand the business over to someone else.
You would go to work for the entrepreneur as a general manager or similar role while they retain complete control of the company and ownership. But over time you take more and more of the ownership and control of the company until you are the majority (or sole) owner of the business. This transition is typically handled in the form of a long-term buyout (where you pay cash for shares over a period of years) or through measurements in how you have grown the business.
The SBA actually has a halfway decent guide for this process. In the end every deal will be different but generally speaking this is a great way to become a business owner without having to go through the startup process.
There are a lot of other important questions that need to be asked and answered before starting a company. With Soldier to Startup, my goal is to compile all of those questions, give as many answers as I can, and help as many veterans start and run their own businesses. To learn more about how to fund your startup along with a lot of other great advice, examples, and resources, visit our site at www.soldiertostartup.com or join us in our Facebook group at www.facebook.com/soldiertostartup.