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How to finance a startup: Pros and cons of 7 strategies used by veterans

April 28, 2016 (Photo Credit: Piksel, Getty Images/iStockphoto)

A former Army engineer captain, Courtney Wilson left the service in 2014 to found DropZone for Veterans, a just-launched service that will connect veterans with a range of non-governmental support services. Her total startup costs may run as high as $100,000 or so. To get the ball rolling, she drew the initial spending cash from total strangers: A crowdfunding campaign generated $4,000 in 30 days.

Wilson gives online fundraising high marks as a means of winning startup capital.

“You do not have to give away equity in your business or intellectual property rights,” she said. “You can take advantage of your backer’s social media clout to help spread the word.”

 

Crowdfunding is just one way to get your big idea off the ground. For the creative veteran, a number of other avenues exist to deliver that initial financial push to set a business moving. The U.S. Small Business Administration gives startup advice to veterans. Then there are these sources:

1. YOU CAN GO TO A BANK

Well, that’s where the money is, as the saying goes.

  • Pros: Banks may have multiple loan options, and they won’t ask for an ownership stake. All they want is the interest. Small businesses may derive some tax benefits if they borrow from banks.
  • Cons: Tedious applications, lots of terms and conditions. They probably won’t give you everything you need. They prefer to lend to up-and-running businesses. They’ll ask for collateral — your house, car — and if the business tanks, you could lose these.

2. EVERY TIME A BELL RINGS …

… an entrepreneur gets his wings. Angel investors are individuals or small groups who put up their own cash to back a promising business plan. Some such as Hivers & Strivers and Moonshots Capital specialize in veteran-owned businesses.

  • Pros: Angels take risks. They aren’t answerable to shareholders, so they have more leeway in pursuing their intuition. They’ll push you to succeed since they don’t make money unless you do. One standard formula says they want to see a rate of return equal to 10 times their original investment inside the first five to seven years.
  • Con: You’ll give away an equity stake in the business, giving them a share of the profits and some control over how the business is run.

3. YOU CAN CHARGE TO THE MAX

Turns out you already have the startup money, right there in your wallet.

  • Pros: Use a credit card to launch the business and you get to keep full control. You don’t have to put up collateral, and there are lots of offers out there that will give you an interest-free grace period.
  • Cons: When the business tanks, your personal credit rating goes with it. Once the interest-free period runs out, interest rates will take a big bite. Your credit may not carry high enough spending limits to meet your needs. Or you’ll charge more than you could ever repay.

4. VENTURE FORTH

Venture capitalists are organized groups of investors come together to support budding business. Some, such as the Veterans’ Opportunity Fund run by TCP Venture Capital, target specific types of entrepreneurs.

  • Pros: Venture capitalists have deep pockets, with more cash available than banks or credit cards. There is no repayment schedule. Investors draw their payback from your success.
  • Cons: You’ll have to split the profits and give away some control of the firm. Even a big chunk of VC cash may not always be worth the price.

5. YOU'VE GOT FRIENDS AND FAMILY

A lot of entrepreneurs have launched by tapping cousins, siblings, comrades in arms.

  • Pros: They’ve probably heard your pitch a dozen times already. They’ll trust you — without collateral. They’ll be around all the time to drive you to succeed.
  • Cons: They may not really understand how business works or when they are going to see some payback. They probably can’t advise as effectively as a seasoned investor. Christmas gets weird.

6. YOU CAN START SELLING TODAY

Bank loans take forever. Finding an angel or a willing VC can be arduous. While you're waiting for the big money to materialize, you can always start building your own war chest by … selling stuff now.

  • Pros: Opens the doors in a minimal way — a small shop, maybe not a prime location — and your costs will be low. Everything you make beyond basic expenses can go into the coffers as future startup money.
  • Cons: You might burn through what little cash you have before seeing any return. Shoestring operations are fine. You just don’t want to stretch the string too thin.
MIL Courtney Wilson
Courtney Wilson left the service in 2014 to found DropZone for Veterans. To get the ball rolling, she drew initial cash from total strangers: A crowdfunding campaign generated $4,000 in 30 days.
Photo Credit: Courtesy of Courtney Wilson

7. YOU CAN ASK TOTAL STRANGERS

Crowdfunding is the new watchword of small-business financing. A range of online sites exist to pair business ventures with willing investors.

  • Pros: It’s quick, easy and helps you build an enthusiastic client base straight out of the gate. Your investors may become your best customers. Putting in a crowdfunding plea also helps hone your marketing.
  • Cons: Crowdfunding works best for simple business models. If yours is more complex, this might not pan out. Likewise, if you need a lot of money to start, you probably won’t find it here.

 

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