By Bill Fay
Family, friends and even his college professors told Aidan Augustin he had a business idea worth pursuing, even if meant dropping out of college.
Augustin and his roommate, Neal Ormsbe, designed a smartphone application that would allow anyone attending a business conference to get connected to and stay connected with the speakers and other attendees at the conference.
The two were juniors majoring in engineering at the University of Florida, but everyone said the idea couldnÂt wait, so they dropped out of school, gave the business a name, Feathr, and opened shop.
There was just one little obstacle left to overcome.
ÂMoney,Â Augustin said, citing the one little obstacle nearly every small business owner must overcome.
Augustin and Ormsbe figured they needed $50,000 to get started. ThatÂs not big money, unless you happen to be 20-year-old college dropouts with meager savings and no assets.
ÂWe knew banks wouldnÂt want anything to do with us,Â Augustin said.
Fortunately, family, friends and their college professors got them started. Their parents agreed to send the same money they would have sent if the two had stayed in school. Friends agreed to work for what amounted to minimum-wage salaries. Professors put some of their own money in the pot, and a small business was born.
It didnÂt take Augustin long to learn why more than half of start-up businesses fail the first year.
ÂWe needed a lot more money than we thought we would,Â Augustin said. ÂWe didnÂt understand the realities of what it takes to run a business. We underestimated costs on everything.Â
That includes the relationship costs when you take loans from people you know, with no guarantee you can pay them back.
ÂThe conversations with our parents and friends got a little awkward because we couldnÂt really show clear signs of progress,Â Augustin said. ÂProfessional investors know the risks involved so itÂs a little easier to deal with them when youÂre starting out.Â
Augustin let Ormsbe and a couple of part-time employees do the development work the next year and devoted more of his time to fundraising. He started with the crowdfunding site Indiegogo, where he found $21,000 worth of backing.
Then he won a lottery that provided free tickets to a conference in Silicon Valley for software startups called the ÂLargest Hack-A-Thon In History.Â It was sponsored by Barracuda Networks, which offered winners $25,000 and a seemingly endless supply of business contacts.
AugustinÂs group beat 130 teams from all over the country and claimed the top prize. That led to a front-page article in his hometown paper, the Orlando Sentinel, and suddenly Feathr had some status.
ÂThat article created a buzz about our company,Â Augustin said.
Feathr picked up a $150,000 award from TiE (The Indus Entrepreneurs) and contacts from the Barracuda Networks conference resulted in the first product sales. The 2014 budget is up to $450,000, most of which will go to pay salaries for the 12 full-time employees now working at FeathrÂs offices in Gainesville, Fla.
ÂWe donÂt having the living expenses they have in Silicon Valley or New York City or places like that, which is a huge advantage for us,Â Augustin said. ÂWe can use our money more efficiently to hire more people and pay them actual salaries they can live on.Â
The best news is that Feathr, now in its third year of operation, still hasnÂt needed a bank loan to stay in business.
ÂWe sort of hopped and skipped from one funding source to another, but weÂve made it so far,Â Augustin said. ÂWeÂre working to keep it going that way.Â
In addition to the crowdfunding, and loans from friends and families that helped jumpstart Augustin’s small business, another option to consider is tapping an annuity. Entrepreneurs who have annuities could use those investments to finance their budding enterprises instead of taking out loans.
The great thing about an annuity is that it’s your money. It’s already there, and you are not borrowing from a lender; however, since the annuity operates as retirement income, there are penalties to taking cash out before retirement.
When you take funds out of your annuity early you can expect the following:
- A 10 percent penalty on the taxable portion of the annuity is forfeited if you are under the age of 59 Â½.
- TheÂ tax deferralÂ benefits are in place to encourage long-term retirement savings, so the fee is similar to what you would pay on an early withdrawal from an IRA.
- In most cases, if you cash out early, you will have to pay surrender charges. If your annuity carries a surrender fee, you should try to wait until the fee no longer applies. Surrender charges generally start at 7 percent and decrease incrementally, usually by 1 or 2 percentage points each year, until they reach zero.
- Earnings on annuities are consideredÂ ordinary income, so you must pay taxes on any earnings when you cash out your annuity. This is in addition to the 10 percent early withdrawal penalty.