Finding the Best Small Business Loans for Veterans
Evaluate your funding options to identify the ideal veteran business loans for you.
After years of taking orders from others, military veterans often decide they don’t want to anymore.
It’s one of the contributing factors to the high number of veteran entrepreneurs. According to the 2018 Annual Business Survey (ABS) sponsored by the Small Business Administration (SBA), the most recent year available, more than 350,000 U.S. companies are owned by veterans, which is just over six percent of all businesses. Taken together they employ almost four million people.
Research shows veterans own businesses in virtually all industries. Plus, there are veterans who are thinking about starting a business, own startups, and have fully mature operations. What they all have in common is that they need loans for a wide range of reasons.
According to a report from the SBA, almost three out of five veterans self-fund their operations, which is a slightly higher rate than non-veteran business owners. This could put their families, homes, and retirements at risk.
Here are some more sensible ways for business owners to finance their operations, whether they’re just starting out or looking to expand or maybe just need cash to get through.
Veterans Administration (VA) loan program.
What are VA loans?
Veterans generally have a more difficult time securing loans than other people. They often don’t have as much work experience and lack the collateral to back them.
Loans that are reserved exclusively for veterans, developed to help level the playing field for them, are referred to as Veterans Administration loans, even though they’re not administered by the Department of Veterans Affairs or Veterans Administration. Typically, the SBA and other groups that support veterans offer business loans to them.
Who is eligible for a VA loan?
Each lender has a different set of criteria when it comes to deciding whether or not to fund a business owned by a veteran. Do your research to learn about the requirements of different loan providers. If you’re unclear about anything, contact them and ask questions. It’s important to do your due diligence before completing an application.
For most lenders, for a business to qualify for VA loan eligibility, it must be 51 percent owned by:
- An honorably discharged veteran
- A service-disabled veteran
- An active-duty military member participating in the Military Transition Assistance Program
- A reservist or member of the National Guard
- A spouse of any of the above
- A spouse of a service member who died in the line of duty or from injuries that were a result of their service.
If your small business meets any of the above criteria, you may qualify for a VA loan.
How do you apply for a VA loan?
Similar to other types of business loans, you will need to gather and submit several documents with your VA loan application. In addition to the usual types, such as a business plan, financial statements, bank account records, tax returns, ownership information, business licenses and certifications, people applying for VA loans will need to provide the following:
- Veterans: a copy of Form DD 214
- Service-disabled veteran: a copy of Form DD 214
- Transitioning active-duty military service members:
DD Form 2 — U.S. Armed Forces Identification Card (Active)
DD Form 2 — Armed Forces of the United States Geneva Convention Identification Card (Active)
DD Form 2648 (active-duty military)
DD Form 2648-1 (reservist)
- Reservists and National Guard members: DD Form 2 — Armed Forces of the United States Identification Card (reserve)
- Current spouses of veterans: Form DD 214 along with evidence they are the current spouse of a veteran
- Current spous of transitioning active members of current reservists / National Guard members: DD Form 1173, Department of Defense Guard Reserve Family Member Identification Card, along with evidence they are a current spouse
- Widows of U.S. military members who died in the line of duty or from injuries sustained while serving: Documentation from the Department of Defense or Department of Veterans Affairs proving the cause of death.
If Form DD 214 isn’t available, NA Form 13038 can be substituted.
Like all lenders, it’s likely a VA loan provider will pull a credit report on you to determine your creditworthiness.
How can funds from a VA small business loan be used?
Loan proceeds can be used for:
- Business startup costs. Some veterans pay business startup expenses on their own. However, many people don’t have the savings to do so. You can use funds from a VA loan to cover expenses related to starting a business including things like incorporation costs, rent, utilities, supplies, salaries, inventory, marketing, and more.
- Pay operating expenses. Once a business is up and running, you can use loan funds to cover ongoing monthly expenses, including things like software subscriptions, office supplies, equipment rental, taxes, and more.
- Hire employees. If you need help to expand your business, you can use VA loan proceeds to hire additional workers. You are also able to use the money to increase the salaries of essential employees.
- Purchase real estate or equipment. If you ever find an ideal location for your business, you can use VA loan money to take advantage of the opportunity. You can also use funds from one to purchase new business equipment.
- Buy inventory or supplies. Sometimes businesses, especially retailers or manufacturers, need to stock up on supplies or parts but don’t have the cash. Money from a VA loan can be used for upfront costs and repaid after items are sold.
- Add a new location. Once a business becomes successful, a VA loan can be used to expand into a second or third or fourth location.
- Remodel. A veterans loan can be used to refresh or expand a place of business.
- Develop or update a website. It can be almost impossible to stay up to date in today’s constantly changing digital universe. VA loan funds can be leveraged to improve your presence online.
- Marketing. You can’t make money if consumers don’t know about your business or the products and services it sells. Business loan money can be used to promote your business, including paying for social media campaigns, coupon programs, direct mail, digital ads, and more.
Other loan options for veterans who are focused on entrepreneurship.
Alternatives to VA loans include:
- Loans from funding firms focused on vets. These types of financial groups have emerged in recent years to help members of the military get business funding. Some specialize in certain segments of the military, such as people who attended different academies or served in certain branches of it. In many cases, these are traditional loans with an equity add-on. The funder will trade an equity stake in return for guidance, advice, and other types of business support.
- Traditional banks, business lenders, and financial institutions. If you have a stellar credit score, you may be able to get a business loan from a bank, lender, or credit union. Your chances of securing a loan from a traditional source are small since they’ve been approving fewer and fewer of them over the years. The plus about getting a loan from a traditional lender is that everything will be straightforward and well documented. Interest rates will also be relatively low no matter the loan term. The minus is that you will likely have to provide a tremendous amount of personal documentation as part of the application process.
- Debt financing for venture capitalists and other investors. Instead of owning a piece of your business, the investor will simply loan you money. The benefit is that you can tap into the knowledge, experience, and connections of the venture capitalist. The negative about this kind of loan is that the interest rates can be very high. This could be the only option for businesses that really need cash and have bad credit, just be careful about who you get it from.
- Small Business Administration (SBA) loans. The SBA offers several small business loan options that are guaranteed in full or in part by the federal government including the popular SBA 7 loan program. Some of them are reserved for veterans. One example is the SBA Veterans Advantage program, which provides loans of up to $150,000 at relatively low interest rates. According to the SBA, almost three-quarters of the loans they approve for veterans are for $350,000 or less. One of the issues with getting a loan through the SBA is that it can be a time-consuming process. The one fast cash option is an SBA express loan offered through the SBA Express Loan Program. They can be had for up to $500,000 and interest rates vary depending on the size of the loan.
- Borrowing from family or friends. If you know someone who has significant savings, you could ask them to help fund your business. It might be one of the easiest ways to get cash, especially if your business or personal financials aren’t very good. Be warned that this type of loan can strain personal relationships, especially if your monthly payments are late or if you can’t repay the money.
- Alternative online lenders. There are many tech-based lenders that match businesses with the funding sources that might be a right for them. You simply apply online, and they find lending options that could be good for veteran-owned businesses like yours.
- Microloans. Microloans are typically reserved for strivers who have experienced hardship because of their racial identity. They could be an option for veterans of color. Your local chamber of commerce or veterans business outreach center may be able to identify possible options for you.
Additional financing options for veteran-owned small businesses.
If none of the choices in the previous section work for you, here are some alternative funding sources for you to consider.
- Invoice factoring. If your business is sitting on a lot of unpaid invoices, you can sell them to an invoice factoring company at a discount. You get fast cash plus it saves you the time you would have to spend collecting on them. The negatives of doing this are that you might have to take a 20 plus percent loss on the invoices and your clients will find out about your business cash issues when another company contacts them to collect on your bills.
- Merchant cash advances. This could be a good possibility if your business processes a lot of credit card transactions. A merchant cash advance (MCA) lender provides the financing you need. Then the MCA lender takes a percentage of your credit card receipts, often ten percent, every day until the financing is repaid. Be warned: MCAs are one of the most expensive repayment terms. Annual interest rates of 200 percent are not uncommon.
- Business lines of credit. It’s usually a good idea for businesses to secure a line of credit if they qualify. It can help you rest assured knowing you have money available for you whenever you need it. You only pay interest when you actually borrow money through the line of credit.
- Crowdfunding. If you can come up with a good and engaging story, you may be able to get the money your business needs through a crowdfunding site like Kickstarter. This type of funding is good for businesses that funders can feel passionate about, such as a novel retail concept or service. Everyday businesses like accountants or arborists may not be as successful with crowdfunding.
- Equity. If financing isn’t available to you, it might make sense to sell equity in your business. In trade for giving up a piece of ownership, you will get money that you don’t have to repay. Just be aware that if you choose this option, you will no longer have complete control over the business you’ve worked so hard to build. You’ll also have to give up a percentage of profits, as well.
- Credit cards. Business owners sometimes turn to personal or business credit cards to fund their operations. This is typically a bad move because credit cards often come with high interest rates and can jeopardize your personal credit rating over the long term.
- Business grants: Grants are another option for veterans who need business funding. Many are reserved exclusively for veterans. While it may take a lot of time and effort to get a grant, it could be worthwhile because you will get the cash you need and won’t have to repay it. Be aware that grants don’t renew, so they aren’t a dependable source of long-term funding for your business.
In the end, it’s up to the individual veteran business owner to find the right funding option for their individual needs. An expert at Biz2Credit could help you explore options with you.
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