Introduction: The Challenges & Issues Securing Traditional Loans
For many people, owning a business is a big part of achieving their American dream. While certain obstacles exist for every American business owner—veterans, minorities, and women tend to face extra challenges when it comes to launching, growing, and running a successful business in the United States.
If you’re a veteran, minority, or woman, overcoming adversity is part of your life. You understand the challenges you’re up against, because you face them on a daily basis. This guide isn’t meant to tell you what you already know, but equip you with the resources and knowledge so you can overcome funding obstacles and achieve your business goals.
The Lending Landscape for Veteran Business Owners
There are 2.52 million businesses in the United States currently majority-owned by veterans.
After World War II, nearly half of all veterans started their own business. According to the Bureau of Labor Statistics, only 4.5% of post-9/11 veterans went on to become business owners (a separate study from Bunker Labs found that 25% of current veterans have the desire to start a business).
So why the discrepancy? When one quarter of military veterans have expressed interest in becoming business owners, and only 4.5% have been able to do so in the past twenty years, it’s important to look at why. And in many cases, the “why” starts with access to funding.
Veteran and non-veteran entrepreneurs need seed money to launch a new business.
The 2018 “Veteran Entrepreneurs and Capital Access” study conducted by the Small Business Administration (SBA) and the Federal Reserve Bank of New York found that veterans had a harder time securing the necessary capital than their non-veteran counterparts. Here are a few reasons why:
- Veterans more often applied for small loans at or below $100,000, which are more difficult to obtain from conventional lenders and banks.
- Veterans often lack a consistent credit history due to their service and lifestyle, leading to less-than-perfect credit.
- Syracuse University researchers at the Institute for Veterans and Military Families believe a lack of education regarding alternative funding options is also part of the problem.
- The 2017 Small Business Credit Survey found that 33 percent of veteran-owned businesses applied for loans from online lenders, and only three percent sought financing from a Community Development Financial Institution (CDFI)—compared to 56 percent who applied for business funding at a large bank, and 52 percent at a small bank.
The “Veteran Entrepreneurs and Capital Access” study also found that 47 percent of majority veteran-owned businesses that applied for financing had to do so three or more times before receiving approval; while only 34 percent of non-veteran owned companies were required to do the same. In addition, 52 percent of non-veteran businesses received less funding than requested, compared to 60 percent of veteran-owned businesses.
The Lending Landscape for Minority Business Owners
A report from the U.S. Small Business Administration in 2018 found that out of 27.6 million businesses operating in the United States, only 7.9 million were minority-owned—that’s less than 30 percent.
In addition to dealing with the same challenges as their non-minority counterparts, minority entrepreneurs face a myriad of obstacles related to running a minority-owned business.
One of the main challenges? Funding.
According to the Minority Business Development Agency, run by the U.S. Commerce Department, these are the top challenges minority business owners face when it comes to securing financing:
- Those with less than $500,000 in annual revenue are less likely to be approved for financing than non-minority business owners with the same annual receipts.
- They are more likely to receive higher interest rates, smaller loan amounts, and shorter pay-back durations than non-minority business owners.
- The average loan amount for a non-minority business with $500,000 or more in gross annual revenue is $310,000; while minority-owned businesses with the same annual gross revenue receive an average loan amount of $149,000.
The Kellogg Foundation conducted research that spotlights the negative impact of institutional racism in the United States. They found that if minority business ownership rates were equal to non-minority numbers, there would be nine million more potential jobs.
Despite the tremendous positive impact minority-owned businesses have and could have on our economy, lending disparities still exist. According to research from the U.S. Census, here are a few reasons why:
- Lower net worth: On average, African Americans and hispanics/latinos have 11-16 times lower net worth than whites—leading to less working capital to start a business.
- Poor location: Businesses in economically challenged communities are less likely to be funded by traditional lending institutions.
- Lack of collateral: Individuals with low net worth are less likely to own a home or car, which are traditionally used as collateral against a loan in case of default. Without the proper collateral, borrowers are issued small loan amounts with shorter payback requirements.
- Lack of credit history: On average, minorities have lower credit scores, making it harder to receive a loan with optimal conditions.
The Lending Landscape for Women Business Owners
Women business owners—regardless of race—have a harder time securing funding than their male counterparts. In fact, in 2018, 42 percent of all U.S. businesses were owned by women—but only 24 percent of businesses that accessed capital were women-owned.
According to the National Women’s Business Council’s report, “Understanding the Landscape: Access to Capital for Women Entrepreneurs,” women business owners continue to face funding challenges above and beyond men. The report was prepared by the Federal Research Division, Library of Congress, with the goal of establishing a knowledge base about women business owners’ access to capital. The following are key takeaways from the report:
- Women rely on personal income sources more than men
- Women raise smaller amounts of capital than men
- Women are more often perceived as “less legitimate” and “less credible”
- Women investors prefer to work with male business owners
Despite these sobering statistics and findings, a recent study conducted by Bank of America and Babson College in the fourth quarter of 2019 found that women entrepreneurs are overcoming funding challenges. “Beyond the Bucks: Growth Strategies for Successful Women Entrepreneurs” discovered three major themes that highlight the barriers women often encounter when trying to grow their business:
- Market misperceptions
- Network exclusion
- Managing expansion while underfunded
The whitepaper also includes a section titled, “Actionable Strategies for Women Entrepreneurs.” The number one strategy for growing a women-owned business? “Explore Various Capital Alternatives.” The researchers urge readers to explore all forms of alternative capital available to them before giving up equity ownership of their business to a venture capital (VC) investor.
Program Options and Opportunities for Veteran-, Minority-, and Women-Owned Businesses
The research, data, stats, and whitepapers all confirm the fact that veteran-, minority-, and women-owned businesses face more funding obstacles than their counterparts. While these challenges do exist, there are dedicated organizations that offer program options and lending opportunities to veteran, minority, and women business owners.
Access Special Opportunities
Veteran-, minority-, and women-owned businesses have increased access to special opportunities from the government and other organizations.
In 1988, New York State signed into law the Minority- and Women-Owned Business Enterprise (MWBE) certification program to promote equal economic opportunities and eliminate barriers to minority- and women-owned businesses in state contracts. Under the statute, “state agencies are charged with establishing employment and business participation goals for minorities and women.” The law says that all state contracts must award 30 percent of the funds to MWBE-certified businesses.
For your business to become MWBE-certified, it must be:
- At least 51 percent owned and operated by women and/or minority owners
- Privately owned
- A for-profit business
- Small, with fewer than 300 full-time employees
- In operation for one year or more, with available business financials and bank records
Once your business becomes MWBE-certified, you’ll have access to a few important advantages that will lead to increased exposure, more opportunities for contracting and subcontracting, better access to capital, and enhanced education. More specifically, your business will:
- Be listed in the public Directory of Certified Minority and Women Owned Business Enterprises
- Be able to bid on contracting and procurement opportunities with New York State authorities and agencies
- Gain access to a statewide network of services including workshops, webinars, classes, etc.
- Have access to special loan and bonding programs like the Bridge to Success loan program.
8(a) Business Development Program
To help achieve its goal of awarding at least five percent of all federal contracting dollars to small disadvantaged businesses every year, the Small Business Administration offers the 8(a) Business Development Program.
For your business to qualify for this program, it must meet the following eligibility requirements:
- Be a small business
- Be new to the 8(a) program
- Be at least 51 percent owned and operated by economically and socially disadvantaged U.S. citizens
- Owner must have a personal net worth below $250,000
- Owner must have an average adjusted growth income below $250,000 for three years
- Owner must have less than $4 million in assets
- Owner must manage day-to-day operations and make long-term decisions
- Be able to perform successfully on contracts
- All principals must demonstrate good character
- Demonstrate a strong potential for success
Once your business is accepted into the 8(a) Business Development program and is fully certified, it can:
- Compete for set-aside and sole-source contracts
- Access a Business Opportunity Specialist for support with federal contracting
- Form joint ventures with businesses through the SBA’s mentor-protege program
- Receive business training, counseling, marketing assistance, and high-level executive development support
Women’s Enterprise Development Center (WEDC)
Since 1997, The Women’s Enterprise Development Center (WEDC) has empowered women entrepreneurs to build successful small businesses in Westchester County and the Hudson Valley.
The non-profit provides startup companies and established businesses with free and affordable tools and resources to help them grow and succeed, including:
- 60 hour comprehensive business training programs
- Individualized counseling
- Networking events
- Assistance with MWBE certifications and loan applications
WEDC offers all of its programs and counseling in Spanish and men are also invited to participate.
VOSB and SDVOSB Certifications
The Veteran-Owned Small Businesses (VOSB) and Service-Disabled Veteran-Owned Small Businesses (SDVOSB) programs are provided by the U.S. Small Business Administration. The goal of these programs is to, “award at least three percent of all federal contracting dollars to service-disabled veteran-small businesses each year.”
To qualify for the disabled veteran’s business program certification, you must meet the following criteria:
- Be a small business
- Be at least 51 percent owned and controlled by one or more service-disabled veterans
- Have one or more service-disabled vets manage day-to-day- operations and make long-term decisions
- Must have a service-connected disability
Certified businesses are able to bid on government contracts with limited competition and are also eligible to compete in the program’s set-aside contracts.
Boots to Business (B2B)
Boots to Business (B2B) offers entrepreneurial education and training through the SBA as part of the Department of Defense Transition Assistance Program (TAP). B2B provides service members and their spouses with business ownership and entrepreneurship classes, resources, and support for a successful transition.
“Boots to Business is delivered in partnership with SBA’s Resource Partners, SCORE Mentors, Small Business Development Centers, Women’s Business Centers, and Veterans Business Outreach Centers and the Institute for Veterans and Military Families at Syracuse University. It is available free of charge at participating installations to service members and their dependents transitioning or retiring from the U.S. military.”
Veteran Women Igniting the Spirit of Entrepreneurship (V-WISE) is operated by the Institute for Veterans and Military Families at Syracuse University in New York. The organization provides training programs in entrepreneurship and small business management to women veterans and female military spouses/partners.
On its website, V-WISE explains that it is, “open to all women veterans, active duty female service members and female partners/spouses of active service members and veterans who share the goal of launching and growing a sustainable business venture.”
Here’s who can qualify for participation in the program:
- Honorably discharged women veterans of any military brand or service era
- Active duty women service members of any military branch
- Women spouses and same-sex life partners of above (including widowed spouses and partners)
The program consists of three phases:
- 15-day online course
- 3-day entrepreneur training event
- Ongoing mentorship, support opportunities, and training for graduates
Qualified participants are responsible for paying a one-time fee of $75, the cost of transportation to-and-from the conference location, and dinner on the second night of the conference. The SBA and private-sector partners fund the rest of the program costs.
Loan Programs with Special Rates and Terms
Along with access to special opportunities, veteran, minority, and women business owners also have access to loan programs with special rates and terms.
SBA 7(a) for Veterans
Military veterans sacrifice a lot for our country, including being away from their families for long periods of time. In some cases, these absences can lead to large gaps in credit history, making it difficult to obtain traditional financing.
The SBA offers a Veterans Advantage 7(a) loan featuring flexible underwriting procedures, low rates, and favorable terms for veterans. This loan can be used for many purposes like purchasing equipment, refinancing debt, or funding new projects.
Applicants must be U.S. veterans and own a business with at least 51 percent veteran ownership. Turnaround timelines and limits can vary. The highest available loan amount is $5 million.
Bridge to Success
Available only in the state of New York, The Bridge to Success loan program was designed to give MWBE-certified businesses the greatest possible chance of securing and performing on government contracts.
The program is offered by Empire State Development (ESD) and features the following benefits to women- and minority-owned businesses:
- Short-term bridge loans
- Affordable interest rates
- Flexible loan requirements
- Lines of credit up to $200,000
- Repayment terms of 12-18 months
Participating lenders, such as Pursuit, partner with ESD to extend the Bridge to Success program to qualified applicants. Those who qualify for a Bridge to Success loan receive the benefits of the program itself, and the support of an experienced lender.
CDFI Loan Programs
CDFIs are mission-driven financial institutions certified by the United States Department of the Treasury’s CDFI Fund. These include banks, venture capital funds, loan funds, and credit unions.
Benefits of securing a loan through a CDFI include:
- Low interest rates
- Higher likelihood of approval
- Simple, straightforward loan products
- Technical and training assistance including mentorship and advisory services
Veteran, minority, and women business owners often choose to work with a CDFI lender due to flexible approval requirements and ongoing guidance and support. As mission-driven lenders, CDFIs are considered non-profit entities and work to support the businesses they serve.
The Treasury Department offers a searchable award database where you can find a CDFI lender near you.
There are plenty of great organizations that help veteran, minority, and female business owners obtain the education and financing needed to grow their business.
For additional information and support about funding your veteran-, minority-, or women-owned business, you can contact us directly or subscribe to our weekly newsletter to receive exclusive content.