More veterans than non-veterans start small businesses in the U.S. Veteran-owned firms have a marked effect on the American economy, employing 5.8 million individuals. Military service has a real impact on the number of small businesses in the U.S. since 45% more veterans than non-veterans are likely to be self-employed and, therefore, employ other people. Because of this, veterans need VA small business loans.
Since so many veterans return from serving their country to start a small business, veterans need VA small business loans both for start-up capital and ongoing funding for their businesses. If you or your spouse served in the military and would like to fund your small business, you can take advantage of several favorable loan options geared towards veterans.
What Is a VA Small Business Loan?
VA small business loans are not made by the Veterans Administration (VA). They are, instead, partially guaranteed by the Small Business Administration (SBA). The loans are made by a bank or another financial institution, like a credit union. A partial loan guarantee means that the SBA will partially reimburse the financial institution that made the loan if the borrower defaults on the loan.
A small business loan provides access to capital for veterans who are looking to start small businesses, obtain financing for ongoing business concerns, and obtain financing for expansion. They often have lower fees, preferential interest rates, and better terms in general than loans made to non-veterans.
These loans do not actually originate from the VA. The SBA has an Office of Veterans Business Development that oversees business loans for veterans. These funds are not provided as grants. They are standard loans that require repayment with interest.
The SBA also provides counseling and training to go along with its loans to give borrowers support in their business ventures. You can use the Lender Match website to find lenders for certain types of loans.
Types of Small Business Loans for Veterans
If a veteran falls short of a financial institution's requirements to obtain a small business loan through conventional loan programs, the Small Business Administration's loan programs provide several types of small business loans.
SBA Standard 7(a) Loan Program
This is the SBA's most commonly used loan program and the most common for veterans. SBA 7(a) loans guarantee up to $5 million, although the recipient might have to pay a fee for the loan guarantee. This loan program is not for start-up businesses. You must have been in business for at least two years, have a good credit score, and your business must generate excellent cash flow. They are excellent loans with low interest rates, low monthly payments, and long terms. These loans can be used for debt consolidation, working capital, and commercial real estate.
The SBA Express Loan is actually an expedited application process for SBA 7(a) loans for veterans up to $350,000. They have a quick turnaround time for the application process, and their loan guarantee is only up to 50% of the loan. Almost 60% of all SBA 7(a) loans are SBA Express Loans.
Military Reservist Economic Injury Disaster Loan (MREIDL)
This type of business loan is the MREIDL or Military Reservist Economic Injury Disaster Loan. This loan provides working capital to businesses that could have met their obligations and continued to meet their obligations had their principal owner not been called up for military service. This type of loan gives the business what it needs in working capital until the essential employee comes back to work after returning from being "called up." There may be no upfront fees on these loans and a 50% loan guarantee.
The SBA Microloan program is for small businesses who don't have access to other types of financing. The maximum loan amount is $50,000. The interest rate on these loans is usually between 8% to 13% and collateral is usually required. Microloans require a significant amount of documentation in order to qualify for them, such as:
- Written business plan
- Business and personal tax returns
- Balance sheets and profit and loss statements
- Financial projections or budget
- Resumes of business owners
- Personal financial statements
- Personal credit report
- Articles of incorporation
- Applicable business licenses and permits
SBA 504 Loan Program
The purpose of the 504 Loan Program is to buy fixed assets and modernize small businesses. These loans are long-term in nature with fixed interest rate financing. 504 loans are made through the SBA's Certified Development Corporation (CDC) funding 40%, an approved lender funding 50%, and the borrower providing the final 10%. CDC's are nonprofit corporations that promote economic development within a community through 504 loans.
- SBA Patriot Express Loan: This type of SBA loan expired in 2013.
- SBA Veterans Advantage Loan: Historically, the SBA Veterans Advantage Loan Program got renewed each fiscal year. The last time it was renewed was at the end of 2018. There is no longer any mention of it on the SBA website. It is unclear whether the SBA still offers this loan.
Who Is Eligible for VA Small Business Loans?
The following classes of the military are eligible for VA small business loans:
- Honorably discharged veterans
- Service-disabled veterans
- Active-duty military service member eligible for the Transition Assistance Program (TAP)
- Active reservists and/or National Guard members
- Current spouse of any veteran, active duty service member, reservist, National Guard member, or the widowed spouse of a service member who died while in service or as a result of a service-connected disability
Veterans who receive a dishonorable discharge are not eligible for the loan programs. If you are active-duty personnel within 12 months of separation or a retiree within 24 months of retirement, you can qualify for the SBA Express Loan Program. Reservists and National Guard are also eligible. The business must be at least 51% owned by a qualified veteran according to the definition above. Most businesses meet the eligibility requirements, as long as the company is not a pyramid scheme, gambling business, or lending business.
What Can the Loan Proceeds Cover?
- SBA 7(a) and Express Loans: The proceeds of these loans can be used for most business purposes. For example, you can add working capital into your business, cover start-up costs for a new business, purchase equipment, buy real estate for your business to occupy, buy the inventory to sell, hire business management, expand your business, set up to sell goods and services to the government (contracting), set up your business for the possibility of your deployment, and recover from declared disasters such as hurricanes, tornadoes, and earthquakes.
- Military Reservist Economic Injury Disaster Loan (MREIDL): The proceeds of this loan can only be used for working capital needs until the essential employee of the business returns from deployment.
- SBA Microloan: Microloans can cover everything but real estate purchases and debt consolidations.
- 504 Loans: 504 loans cover fixed assets for expansion and modernization.
How the Guaranty Program Works
The amount of money you can borrow depends on the lending institution you go through. You may qualify for a larger loan, but the SBA will only provide a guaranty for loans up to certain loan limits. The SBA 7(a) program provides a guaranty of 85% of the amount borrowed up to a maximum of $150,000, or a 75% guaranty of the amount borrowed above $150,000. SBA Express loans receive a 50% guaranty.
The interest rates will usually range from 2.25% to 4.75% over the current prime interest rate. You can always try to negotiate a lower interest rate with your specific lender.
If you need help finding a lender, the Small Business Administration has local offices in every state that can help you, or you can check this list of local offices.
Deployment and the MREIDL Loan
The purpose of this loan is to provide for the business's necessary expenses that cannot be provided for because the essential employee is not present in the business. The purpose of this loan is not to replace lost profits. The purpose is to cover financial obligations and replace working capital so the business can survive.
The interest rate on the MREIDL loan is 4%. The maximum term of the loan is 30 years, though that depends on individual circumstances as does the amount of the loan. The MREIDL loan usually has a maximum amount of $2 million, but exceptions may apply depending on the amount of economic injury to the business due to the active-duty call-up of the essential employee.
Alternative Small Business Sources of Financing for Veterans
There are also private loans that are geared toward veterans:
- Street Shares: This is a source of loans for veteran-owned businesses that have been in operation for over one year. Loan amounts are available up to $250,000 with competitive interest rates.
- Hivers and Strivers: This source of angel investors offers equity financing, as opposed to loans, to graduates of the U.S. military academies who are also veterans. Typically, the first round of funding is $250,000 to $1,000,000 and the investors take an active role in helping the company.
- Connect2Capital: This company strives to connect small business owners to mission-driven sources of funding for their small business, along with counseling and education. They strive to connect veterans, lenders, and community resources.
- Smartbiz: A specialist in SBA loans for veterans, this company is highly regarded because of its fast application and disbursement procedure for most types of SBA small business loans.
- Service-Disabled Veteran-Owned Small Business Program: If you are an eligible, disabled veteran, you may qualify for certain federal contracts.
- VA small business loans are not made by the Veterans Administration. They are partially guaranteed by the Small Business Administration and made by financial institutions.
- The SBA Express Loan, part of the SBA Standard 7(a) Loan Program, is one of the most popular VA small business loans.
- The SBA Microloan is for very small businesses with limited funding needs.
- Different SBA loan programs cover different business needs.
- There are alternative sources of financing for veterans who own businesses, including both grants and contracts.