Small Business Financing Options for Veteran-owned Businesses

When you hear the phrase ‘small business owner,’ you might think of someone who inherited the family business, bootstrapped a tech company from their parent’s basement or possibly a baby boomer who launched a business as an encore career. Main Street America has many residents who fit all of these descriptions. But there’s another group of entrepreneurs who take the road less traveled to business ownership: U.S. military veterans.

According to a recent Guidant Financial survey, military veterans accounted for approximately 12 percent of their small business owner clients in 2016.  And an increasing number of service men and women are returning from their final tours and turning to business ownership as an alternative to retirement. In fact, a study by the Small Business Administration found that veterans are 45 percent more likely to be self-employed than non-veterans, and there are 2.4 million veteran-owned businesses in the United States.

The skills acquired in the military such as discipline, organization and self-motivation translate seamlessly into business ownership. Transitioning from serving our country to civilian life can be challenging, but business ownership is a fun and exciting opportunity to apply these skills in a new arena while embarking on a fresh career.

According to Guidant’s survey, the majority of their clients spent an average of $100,000 to start or buy their business, But for many veterans, securing this kind of capital can be difficult. Fortunately, military veterans have several financing options to choose from. Here are three of the best small business funding options for veteran-owned businesses.

1. 401(k) Business Financing

Many service men and women who retire from the military aren’t looking to settle down on the golf course but are ready for a new career — their next mission. The Thrift Savings Plan (TSP) offered to U.S. civil service employees can help them do just that. After leaving active service, the funds in a TSP become rollable, meaning veterans have the option to transfer the funds into another kind of retirement account. Using 401(k) business funding, or Rollovers for Business Start-ups (ROBS), makes it possible to roll some or all of the retirement funds into a new 401(k) account which can then be used to start or buy a business without triggering tax penalties or getting a loan.

Although starting a new business always comes with some amount of risk, this funding method is becoming increasingly popular because it removes the burden of debt. There’s no loan to repay, so revenue earned from the business can be recycled into operations rather going toward loan repayments. As an added bonus, Guidant recognizes veterans (and their spouses) for their military service by providing a $500 discount on our ROBS setup fee.

Learn more about ROBS in our ebook, Everything You Need to Know About ROBS.

2. Small Business Administration Loans

A tried and true method of small business financing in the U.S. is a Small Business Administration (SBA) loan.  Traditional banks and credit unions provide SBA loans, but the SBA guarantees up to 80 percent of the loan, which encourages financial institutions to loan more money. These loans do, of course, come with debt, but there are no ballooning costs and interest rates are intentionally set to be favorable for small business owners — encouraging new commerce and supporting the proprietors on Main Street America. Many banks offer a discount to veterans who qualify for an SBA loan, the SBA itself offers a 50 percent reduction to the Guaranty Fee for veterans, and Guidant also offers a 10 percent discount for veterans who use our SBA consulting services.

The biggest hurdle in obtaining an SBA loan is acquiring the cash to make the initial down payment, otherwise known as an equity injection. Typically, 20 – 30 percent of the full loan amount is required for a down payment as a part of the approval process. Veterans have a unique option when making this initial payment. Valor Acquisition Partners (VAP) is a group of accredited investors who work specifically with veterans interested in owning a business. Recognizing that a down payment on an SBA loan can be a tough financial feat for any new entrepreneur, VAP provides the initial capital injection on loans for veterans and in turn, the investors gain shares in the new company.

Another route to obtaining a small business loan is to combine ROBS with an SBA loan. Once the ROBS process is complete and the corporation is in possession of the funds, the money can be used as the down payment on an SBA loan. This process is ideal because a larger down payment can mean access to more funds and better terms on the loan.

3. Veteran Grants and Assistance Programs

Various resources exist online for both funding veteran-owned businesses as well as business coaching and mentorship programs. The Veteran’s Business Fund (VBF) is a nonprofit organization created by professionals in both the small business and banking arenas in an effort to support veterans trying to launch a business. Similar to Valor Acquisition Partners, VBF helps veterans obtain the equity required for the initial capital injection on a small business loan. However, the VBF assists veterans in receiving both SBA loans and traditional bank loans and is funded by donations rather than investors who become shareholders.

The U.S. Department of Veteran Affairs has created a Veteran Entrepreneur Portal which connects hopeful small business owners with a plethora of resources and services. The Veterans Affairs department can also assist in registering a new business as veteran-owned, which can help in qualifying for financing programs as well as getting certain government contracts down the road.

To the veterans who are looking to become entrepreneurs, we thank you for your service and support your dreams of business ownership. Financing is the first challenge, but with the right help, it’s the initial step on a long and successful journey as a small business owner.

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