All business startups require some amount of funding to get operations up and running. There are myriad avenues a veteran entrepreneur can take to acquire capital, but knowing which are best for your business is crucial to achieving success later down the road.
Experts from the 2020 Veterans Florida Virtual Expo’s entrepreneurship funding panel discussed many of the common pitfalls, how to avoid them, and what you can do to successfully fund your venture when starting on a shoestring budget. Here are their takeaways for how you can acquire funds to get your veteran-owned business off on the right foot.
Know Your Funding Options
There are many ways to fund your business, and each method comes with its own set of risks and rewards.
Bootstrapping — the process of building a company from the ground up with job income, personal savings, and little to no outside assistance — gives you the most control over the business without having to give up equity, but requires enough capital to keep everything afloat until there is sustainable revenue from day-to-day operations. This method may take the longest to realize profitability, but it’s also the least risky since you can keep your job until the business is viable.
Loans can be beneficial early on for some entrepreneurs since they provide upfront cash at fixed rates without you needing to give up a share of the business. If you need to take on debt via bank loans, then have a clear understanding of the terms of agreement and avoid getting stuck long-term by ensuring that short-term revenue gains can pay it off.
Lines of credit are another option, but it’s recommended to only use it in two scenarios: Emergencies, such as a slowdown during a pandemic, and to establish relationships with a bank. Our experts recommend paying off lines of credit within 90 days.
Consider business partnerships only if they can match your commitment. Splitting everything 50-50 can be great if you and the partner are doing equal work, but unbalanced work ethics and conflicting visions can be a death knell for a business partnership.
Marcia Kichler Schuffman, Program Coordinator at Military & Veterans Resource Center at the University of West Florida, recommends veterans look “at everyone who wants to invest as stakeholders, and identify what is important to all of them” then determine the best funding option that suits the needs of your business.
Consider Employee Equity and Other Benefits
After you’ve determined the businesses’ funding needs, hiring people with a vested interest in the company becomes a viable option if they’re willing to take reduced compensation in exchange for equity.
“You don’t need a lot of capital, you just need to find the right people,” says Learning Alliance Corporation CEO Cesar Ruiz. “And if you have the right process, you can slice them a piece of the pie as they earn it.”
Take equity, in either perceived value or future value, and distribute shares to employees when they meet specific criteria. Not only does this help reduce early-stage salary expenses but employees’ overall income will grow as the business profits.
While divvying up equity may be valuable to one employee, that may not be the case with other members of the team.
“Not all people value things the same, so you can bring people in and what they value may be very different from the next person,” said Dr. Sandra Kauanui, Institute for Entrepreneurship Director at Florida Gulf Coast University.
Because funds are often tight in the beginning, and things like annual bonuses may not be feasible, discuss options with employees and provide a variety of benefits that they can choose from. Offering extras, such as flexible work hours or out-of-office perks, can compensate for work beyond salary and go a long way toward maximizing the entire staff’s productivity.
Understand How to Attract Investors
One of the biggest misconceptions out there is the notion that anyone can “get an investor” right off the bat. Unless you’re an entrepreneur who’s already well-connected or has a proven track record with a 9 or 10-figure exit from a past venture, don’t expect investors to hop on board until tangible results can be shown from the work and money you’ve put in yourself. As Dr. Kevin Cox, Assistant Director of Adams Center for Entrepreneurship at Florida Atlantic University, puts it: “You can get investors for a business, but not a business idea.”
Once production has begun or services are up and running, revenue and pricing strategy become the two primary aspects that lending institutions and investors will want to see when weighing whether your business is worth the risk.
And in recent years, investors have taken a keen interest in any business with impressive recurring revenue, such as ones offering products or services through subscription models. Obtaining new customers can be expensive but selling to a dedicated base of buyers is both inexpensive and is more likely to lead to even more future transactions.
“It doesn’t matter what your business is, it’s always easier to sell to an existing customer,” said Dr. Kevin Cox.
Ultimately, every business is different, and determining the funding method that works best for your veteran-owned business is the surest way to put your venture on the path toward success.
Check out the Virtual Expo’s Entrepreneurship Panel on Funding for more details and insights from our experts.