A Veteran’s Guide to Starting an Online Business (Getting a Small Business Loan)

If you’ve read any of the other entries on Starting an Online Business you will know the purpose of these posts are to help anyone looking to make the transition from the military life to starting their own online business.  In this edition I will discuss finances, capturing a small business loan and even a veteran small business loan, how to financially plan for your entry into the market as well maintain your funds through your initial stages of growth.

One thing I would like to point out in this article is that advice on money should always, without a doubt, be taken with a very heavy grain of salt.  My advice comes from me as a small business owner, not as a financial advisor.  I will say I’ve managed our company’s funds through thick and thin and I do have a good idea of what works and what doesn’t.  That being said there are people out there with a lot more money than me who could easily provide a better insight.  Without further adieu, here is my advice…

Step 1 – Get a small business loan

If you’re looking to start a company I personally would recommend not using your own funds.  Your own funds should be reserved for a rainy day, keeping a roof over your head and maintaining your own financials until you’re able to get the company to pay you money.  There are plenty of ways to capture outside funding to include getting a small business loan, getting an angel investor, getting a line of credit and or getting a venture capitalist.

If you’re looking to get a small business loan I would recommend looking at the following companies:

  1. On Deck
  2. Loan Builder
  3. Blue Vine
  4. Funding Circle

When you’re looking at your Small Business Loan you will want to consider a few things.  First, ensure you’re borrowing enough to cover your business expenses.  The biggest mistake people make is not calculating all of the expenses they might incur.  For starting an online business you will want to considering some of the following costs:

  • Labor (shipping, marketing, production, legal, financial etc.)
  • Legal fees (this one sneaks up on people a lot, you will need agreements for a wide variety of things from operating agreements to trademarks and more)
  • Trademark and patent fees (pro-tip: patent, copyright and trademark your intellectual property!)
  • Rent
  • Insurance
  • Subscription fees (this includes things like mailchimp, apps, financial automation tools, photoshop etc)
  • Research and Development (always aim high on this one)
  • First stocking orders (this one get’s people a lot because they don’t anticipate MoQs or minimum order quantities required by a manufacturer)
  • Shipping fees (boxes, tape, labor, label maker, labels, shipping insurance)
  • Marketing (I personally recommend aiming high on this one.  If you need help on marketing hit us up!)
  • Travel expenses
  • Clothing (if you need to meet with clients or have your employees wear a uniform)
  • Samples and giveaways (we include this in marketing)
  • Interest on your loan
  • Building a website (this is another one that will cost a lot more than you expect…. also if you have a “friend” who says they will do it for you, run away)

This is just a short list.  It’s good business practice to write out all of your potential expenses before jumping in!

When you’re looking at your small business loan you will want to really look at the details of the loan.  When deciding which loan to choose, ensure you look at the APR (annual percentage rate), payment terms, length of the loan, quality of the company providing the loan, penalties for faulting on the loan and easy of working with the loan company.  While having someone fund you can be difficult, it’s essential that you not just jump at the first company willing to square you away.  Make sure you do your due diligence and shop around!

Step 2 – Getting a line of credit

A line of credit is a lot like a loan, however the bank will give you a number, say $100,000 that you can pay back and borrow at will.  Most often you have to pay a line of credit down to 0 in a certain time period, usually a year.  The purpose of a line of credit is to float your company when you have large orders coming in and delayed payments.  For example if a company wants to buy 10,000 units of a product and is asking for NET30 terms (meaning they would pay you 30 days after they receive the product from you) but your manufacturer wants you to pay up front you would need to use a Line of Credit to pay the manufacture while you wait for funds to come in from in from your vendor making the order.  I would strongly recommend getting a Line of Credit set up early on, even if you don’t need it.  One good practice is to get a Line of Credit and borrow against it even if you don’t need to, then pay it off as soon as you can.  This establishes a history of being able to pay off your debts which will help a lot when you go to get additional funding.

Step 3 – Look for grants and angel investors

Angel investors are people who are willing to lend you money at 0% APR or a very nominal APR.  These are wealthy individuals who simply want to see individuals like you be successful.  How do you find an angel investor?  Good question.  Usually they are friends, family or just good citizens.  RE Factor ended up using a family member who invested into our company from the start.  Her contribution ended up being the difference in the initial success of our company and we are forever in her debt because of it.

Grants are funds provided by the US government for a wide variety of reasons. You can qualify for grants for having a certain ownership status (Veteran owned, minority owned etc) or for a wide variety of other reasons.  If you’re looking to see what grants you qualify for I’d suggest starting at https://www.grants.gov/.  There are also some grants available from larger business such as FedEx who offer a yearly grant of up to $25,000. 

Step 4- Plan for growth

One of the biggest mistakes new small business owners make is pulling out funds to pay themselves too early.  Just because you have $50,000 deposited in your account doesn’t mean that you actually have $50,000 to pay yourself.  The moment you start to make money you should immediately start to save for a rainy day.  Usually small business owners will start to see good income that comes from hype and early success and they think that the upward trend will continue indefinitely.  In many cases small businesses see great returns early on because they are new, hip and popular.  However, that initial hype can easily wear off quickly and you will find yourself struggling to maintain your business as you settle into your market.  Energy drinks are a great example here.  Most often energy drinks hit the market quickly and see incredible short term returns.  Consumers see a new can with promises of energy, vitamins and vitality and want to try the new hottest stuff.  But after 3-6 months that initial hype wears off and those companies are now competing with the giants like Red Bull and Monster.  Most often those companies end up folding in less than a year.   As a general rule of thumb you should plan on not paying yourself for at least 12 months *longer if possible* and you should reinvest what you make into the company.  Those reinvestments should go to R&D, marketing, optimizing your supply chain and increasing profits.

Step 5- Find additional investing

Now that you have your initial success you should shoot for follow on investments.  Even if you find yourself being successful you should still look to increase your liquid capital (these are funds you have available for operating your business) to help take your business to the next level. These follow on investments can come in a wide variety of forms but steps 1, 2 and 3 are probably your best bet.

Things to Consider with Investors

When seeking out investors you will want to find some sort of incentive to capture their interest.  Nobody will just want to give you their money for the hell of it so you have to give them a reason to invest in you.  Most often people offer ownership/shares in their company, good returns on their investment or other incentives.  For example charities, museums and schools often name buildings or events after investors/donors.  Either way they are still offering a concrete incentive for that person’s cash contribution.

If you do decide to offer a return on your investment keep in mind the cost you’ll incur on the interest on that loan or line of credit.  This can actually be quite a bit of money depending on how much you borrow and what sort of terms you offer.  You will want to ensure that you factor it into your monthly budget. On the flip side, once someone invests in your company or obtains ownership in your company you no longer just answer to yourself.  Investors will want to see profits and growth.  You may be required to make unnecessary business decisions just to keep your investors happy.   In addition, panicked business owners will often offer more ownership than needed in their company.  Step 1 is to always get a third party company to evaluate your business and its present/future value.  You will see a lot of bad business evaluations if you ever watch Shark Tank.  People will say they’d like $100,000 for 10% steak in their business thus evaluating their business at $1,000,000 even though they might have produced $20,000 of sales their first year of business.  This will always get shot down because the incentive they are offering doesn’t match the investor’s contribution.  Once you get a good evaluation of your business you can start to go to investors with concrete offers.

Another solid piece of advice is to go after investors who can also be mentors.  Many investors have the money they have because they are business savvy.  These guys/gals can be a huge help in guiding you with your business.  They are also more likely to understand pitfalls and downturns in the company because they’ve most likely been there themselves.

Don’t borrow from family members!  I will admit that I am guilty of this… However, in general not using family members for personal loans is a really good idea.  More families are broken apart by money than just about anything else.  It also puts a huge burden on you and if you fail you’re not just wasting someone’s money, you’re wasting a family member’s money.

Still looking for a small business loan?  Consider some of these guys if you are!

  1. On Deck
  2. Loan Builder
  3. Blue Vine
  4. Funding Circle

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