VA Business Loan: Financing for Veteran-Owned Businesses

Business Loans for Veterans

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VA Business Loans

Did you know that nine percent of U.S. businesses are veteran-owned, according to the U.S. Census Bureau? These businesses employ nearly 5.8 million people in the United States and contribute $1.2 trillion to the economy. It’s no wonder veteran-owned businesses are so successful, considering the training and qualities nurtured in the military like leadership, initiative, perseverance, and strategic thinking. Though these virtues are valuable, one skill with which some veterans struggle is financial management. There are special VA business loan programs and other services available to help veterans manage money in their business and personal lives.

More veterans than non-veterans choose self-employment, illustrating a propensity for independence. According to the U.S. Department of Labor Statistics, 7.1 percent of veterans are self-employed compared to 6.4 percent of non-veterans. Additionally, self-employment is often a good fit for veterans who may have a hard time finding traditional jobs due to physical and mental challenges resulting from their service, a disconnect between their military skills and the skills that civilian employment requires, or a general lack of job openings when their service time is complete.

The Truth About Business Funding for Veteran-Owned Businesses

While many veterans choose to start their own businesses, financing their companies can be a challenge. Since the military handles necessities like food, lodging, and transportation, many young military service members don’t have the opportunity to build credit. They don’t have a need to take out a car loan, pay rent, or use a credit card to furnish a first apartment, so building credit while actively serving is difficult, if not impossible. Unfortunately, without an established credit history or banking relationships, securing financing can be a large hurdle to building a business. Due to times of active duty, service members can also have gaps in their financial history. Most investors view this gap negatively.

Numbers gathered by the U.S. Small Business Administration (SBA) reflects the difficulty that veterans face securing financing for their businesses. Their research found that, by far, the largest source of capital for veteran-owned businesses was personal or family savings at 61.7 percent. Only 9.8 percent of veteran-owned firms used business loans from banks or other lenders as a source of capital.

The U.S. Department of Veteran Affairs and VA Small Business Loans

While the U.S. Department of Veterans Affairs does provide veterans with many benefits and resources, including VA home loans, health care options, education, and vocational training, it does not offer a VA business loan. However, the U.S. SBA does have an Office of Veterans Business Development that provides entrepreneurial help to veterans, including access to government-backed small business loans.

The SBA’s Office of Veterans Business Development helps to ensure that veterans and their dependents know about, and take advantage of, all the government programs that aim to ease their return to civilian life and encourage their entrepreneurial success. The Office of Veterans Business Development has a number of programs and services that assist would-be and existing veteran business owners, including counseling, training, and mentorship.

The SBA and VA Business Loans

Neither the SBA nor the Office of Veterans Business Development loan money directly to veteran entrepreneurs. However, the SBA does guarantee traditional bank loans for small businesses. This means that should the business default on the loan, the SBA will pay a portion of the remainder back to the lender. The SBA offers this service to encourage banks to lend to small businesses that are otherwise too great of a risk. By helping small businesses obtain the financing they need to grow, the SBA positively impacts the U.S. economy. The SBA’s Office of Veterans Business Develop is a liaison to connect veteran-owned businesses with SBA services like its loan program.

The SBA has several small business loan programs that address specific business needs. This ranges from general startup costs to real estate development to natural disaster recovery. One of its loan programs that directly helps veteran-owned businesses is called Veterans Advantage Guaranteed Loans. This VA business loan program falls under the SBA’s 7(a) loan classification. This means it provides general-purpose loans to start or grow a small business.

SBA Veterans Advantage Guaranteed Loans

This loan program is intended to serve those who have served our country by helping them successfully operate a business. The SBA hopes to encourage lenders to work with veteran-owned small businesses by backing this VA business loan program and reducing certain fees.

As a 7(a) loan, an SBA Veterans Advantage Guaranteed Loan can be used for a variety of purposes. Funds can cover working capital, commercial equipment, real estate, and corporate acquisition. It cannot be used for a handful of reasons like repaying delinquent taxes and participating in an activity that is not considered “sound” by the SBA.

SBA 7(a) loans have no set minimum and can span up to $5 million. The SBA guarantees up to 85 percent of the value of the loan with a cap of $3.75 million. Lender fees range from 0.25 to 3 percent. Interest rates vary, and the business and the lender can negotiate the rates. However, they cannot exceed the maximums set forth by the SBA. Borrowers make monthly payments on a combination of principal and interest.

Qualifying for the SBA’s VA Business Loan

To qualify for the SBA’s VA business loan, a business must:

  • Do business in the United States
  • Do business in the United States
  • Meet SBA guidelines of a small business
  • Operate for profit
  • Have invested equity in the business
  • Have exhausted other financial resources before seeking help
  • Be able to demonstrate a clear need for the loan
  • Not be delinquent on any taxes or government debts
  • 51 percent of ownership and control must be by a person or persons in the following groups:
    • Honorably discharged veterans
    • Active duty military service members eligible for the Transition Assistance Program
    • Active reservists or National Guard members
    • Current spouses of any veteran, active duty service member, reservist, or National Guard member
    • Widowed spouses of a service member who died in service or from a service-related disability

Applying for a VA Business Loan Through the SBA

To apply for a VA business loan through the SBA, individuals must provide documentation, including:

  • Military discharge papers or military identification forms
  • Proof of marriage for spouses applying to the program
  • Relevant business paperwork such as balance sheets, bank statements, legal proof of ownership, and business licenses

Alternatives to a VA Business Loan

If the SBA's VA business loan option is not a good fit for your business, there are still many alternative business funding options available for veteran-owned companies:
  • Small business grants: Many organizations provide small business grants specifically for veteran business owners. Unlike a loan, you don’t have to pay a grant back. If an organization chooses your application, they will grant you the money as a one-time monetary gift.
  • Alternative lenders: Alternative lenders make it easy to comparison shop for loans online. After you fill out your application information, potential lenders will bid for your business. You can review their offers all in one place and they fund your loan rapidly.
  • Business line of credit: A business line of credit works a lot like a credit card. A lender predetermines the amount that you can borrow from a bank, or lending company, as needed. You pay back the amount you borrow at regular intervals with interest. The upside is that you only have to pay interest on the amount you’ve used. Many businesses like to have a business line of credit in case of an emergency or one-time opportunity.
  • Equipment financing: Often, businesses apply loans to equipment purchases. Alternatively, you can finance the equipment and pay it off a little bit each month (plus interest). Equipment financing doesn’t require a good credit history or valuable collateral. The equipment itself is the actual collateral. That means if you default on your payments, the lender will repossess the equipment and sell it to make up the difference.
  • Accounts receivable financing: Also known as invoice factoring, accounts receivable financing involves a business essentially selling its outstanding invoices to a factoring company for cash up front. The factoring company then collects on the invoices for a fee. This type of financing is ideal for businesses that need a short-term cash infusion to take advantage of a timely opportunity. You can also use the funds to overcome a temporary gap in cash flow.
  • Merchant cash advance: A merchant cash advance (MCA) is a loan that is paid back to the lender by taking automatic deductions from your credit card sales. You and the lending company agree on a percentage that they remove on a daily basis (with interest) until you pay back the loan. An MCA is more accessible than a traditional bank loan. This is because there are no requirements on your credit or operational history. Since the amount repaid is a percentage of sales rather than a flat amount, it is perfect for businesses that may experience seasonal ups and downs.
  • Credit cards: Some owners choose to use business credit cards to finance all of their purchases. These can be in the business’ name or in the owner’s name personally. Many businesses enjoy rewards programs that help them earn free airfare or cash back.
  • Crowdfunding: There are a number of platforms that help businesses get off the ground using crowdfunding. This financing method involves members of the public donating small amounts of money to help the business meet its fundraising goals. In exchange, donors will often receive a small perk, like a first-run product or a t-shirt with the company logo.
  • Equity investors: Venture capitalists and angel investors are just two types of backers who provide cash to grow your business in exchange for a percentage of ownership of the company. There are many firms that specialize in growing veteran-owned businesses specifically.

No matter what financing approach you choose, whether it be a VA business loan or other option, there are many opportunities to help veterans successfully engage in entrepreneurship.