According to research conducted by the U.S. Small Business Administration, roughly one out of every 10 veterans owns a business. At least 442,000 of these veteran-owned businesses have employees.
What’s more startling is that only 45 percent of all veteran-owned businesses make more than $25,000 per year.
For veteran entrepreneurs who do not have easy access to startup or expansion financing, SBA loans can be helpful. For SBA lending programs, the SBA steps in and acts as a guarantor for recognized financial institutions’ loans.
One of SBA’s primary goals is to help make capital funding available, through banks and other lending partners, to small businesses that would not otherwise be able to access capital conventionally. The SBA works to accomplish this goal through its various loan guaranty programs.
Continue reading to learn more about the loans available to assist veteran business owners in starting and growing a company.
Types of SBA Loans
Unfortunately, there is no SBA financing program exclusively for veteran business owners. Rather, any qualifying small business borrower, including veterans, can apply for the different SBA lending programs. However, veteran business owners may be eligible for special fee reductions.
A description of the main SBA loan programs can be found below:
SBA 7(a) Loan
The 7(a) loan is the SBA’s flagship loan guaranty program, offering a wide array of uses.
This program is ideal for borrowers seeking up to $5 million to expand or renovate an existing commercial property; purchase furniture, fixtures, or equipment; refinance debt for compelling reasons; perform leasehold improvements; or obtain a sufficient amount of working capital.
If you are a veteran, you will pay lower fees than non-veterans, and in some situations, the full fee will be waived.
Only businesses that have been in existence for at least two years are eligible for SBA 7(a) loans.
SBA Express Loan
The SBA Express loan has a lot of the same features as the 7(a) loan, except the application procedure is expedited and generally the maximum loan amount is $350,000.
Under this program, veteran-owned businesses and businesses owned or controlled by one or more of the following groups: active-duty military in TAP, reservist or National Guard member or a spouse of any of these groups, or a widowed spouse of a service member or veteran who died during service or service-connected disability, will benefit from ZERO upfront guaranty fees.
SBA 504 Loan
The SBA 504 Loan program intends to assist small firms with modernization and fixed asset purchases.
It is offered through local banks, in partnership with Certified Development Companies (CDCs), which are licensed by SBA. Borrowers service two loans (bank loan and CDC loan) while benefitting from long-term fixed rate financing from the CDC and expanded maturity on both loans.
SBA Microloan
SBA microloans are smaller loans provided by non-profit and community-based groups. Proceeds from a microloan can be used for a variety of things, including supplies, equipment, working capital, and even debt consolidation. This type of loan usually has a $50,000 cap.
Things to Consider Before Applying
SBA wants to support veteran entrepreneurs with feasible ideas that can help grow communities. Fulfilling the qualifying requirements and understanding the steps allows the SBA loan process to go smoother. Before applying for an SBA guaranty loan, here are a few things to think about.
1. Eligibility
If you match one of the following conditions, you may be eligible for an SBA guaranty loan based on your veteran status:
- Honorably discharged personnel
- Veteran with service-disability
- Military members on active duty who are a part of the Transition Assistance Program(TAP)
- Active reserve member and National Guard personnel
- Current or widowed spouse of an active service member, reservist, veteran, or National Guard member
Note, SBA guaranty loans are not available to enterprises engaged in lending, gambling, pyramid schemes, and other similar activities.
2. Utilization Criteria for the Loan Proceeds
Certain SBA guaranty loans prevent you from buying real estate or consolidating your debts. Some only enable you to borrow money if you’re having financial hardships. Before applying for SBA-backed financing, inquire about the terms of usage with your loan officer and SBA officials.
3. Interest Rates
Lenders evaluate the risks associated with your business and calculate an interest rate that is in line with those risks. This rate is generally a few points above the prime rate. In Arkansas, many banks offer SBA guaranty financing at competitive interest rates.
Be sure that you understand the full terms of the loan before signing on the dotted line.
4. Fiscal Discipline
What factors do lenders consider when approving a veteran small business loan? Most look at the four Cs: cash, credit, collateral, and capacity.
- Cash – Generally, commercial loans, even with the SBA guaranty, will require the borrower to contribute cash funds toward the project. You should know the total amount needed for your project and be prepared to contribute at least 20% of the amount yourself.
- Credit – An individual’s credit score is an indicator of how the person has utilized and repaid debt in the past. So, what is the minimum credit score that the SBA will accept? In general, a credit score of 680 or higher is optimal for your firm to acquire financing, depending on the lender and the type of SBA loan.
- Collateral – It is a lender’s job to minimize risk associated with commercial loan projects. With the SBA guaranty programs, risk is minimized already. However, to further protect themselves, lenders may place liens on business and personal property. In the event of a default, the bank will collect the collateral needed to become whole on the loan.
- Capacity – Prospective borrowers need to show experience and a positive track record within the industry. Does your resume present a positive work history? Have a vision paper or business plan to demonstrate to loan officers and SBA authorities that you are knowledgeable about your company’s demands and industry.
Keep in mind you may qualify for a larger loan than you need. Make sound business judgments, and only take out an SBA loan if you and your stakeholders can afford it.
What do you need to apply for a Small Business Administration loan? This is a crucial question to bring up with your loan officer. Make a checklist so you don’t forget anything.
ASBTDC Is Here for You
Once you decide to apply for an SBA loan for your veteran-owned business, don’t let the vast documentation and lengthy process throw you off.
At the Arkansas Small Business and Technology Development Center, we can assist you with financing consultations, market research, and each step of the loan application process. If your financial records, tax filings, or other documents aren’t in order, you can be rejected. We are well-versed in preparing complete loan applications.
Our tailored solutions can push your business to new heights, whether you manage a firm with dozens of people or work out of your garage.
Want to know more? Check our FAQs or reach out for more details.