Everything you need to know about VA small business loans
Many veterans return from active service with a desire to start civilian life as their own boss. If you’re a veteran or active military member with an established business that could use some financial assistance, or if you’re still looking to get your small organization off the ground, there are a variety of lending programs that can help you strengthen your company and lead a successful small business.
What is a VA small business loan?
Unlike VA mortgages, which are backed by the Department of Veterans Affairs, VA small business loans are partially guaranteed by the Small Business Administration. The SBA is a government agency with the purpose of driving entrepreneurship and fostering the development of small businesses.
According to SBA.gov, veteran-owned businesses represent one of the fastest growing segments of the economy. This agency has its own Office of Veterans Business Development, which takes in applications and helps back loans provided by third-party lenders.
How much can I get for a VA small business loan?
VA small business loans can offer benefits to a wide range of companies facing a variety of financial needs. The maximum amount you’ll be able to borrow through a VA small business loan will depend on your financial goals, the nature of your business and which lending plan you ultimately choose.
Your borrowing limit will also depend on which lender you go through to secure your loan. You might be approved for a large loan, but the SBA can only guarantee a limited portion of the financing. SBA express loans, for example, guarantee 50% of the loan with a maximum loan amount of $350,000.
The interest rate attached to your loan will also impact how much you can afford to borrow. While the interest rate attached to your loan might vary, lenders will always use the prime interest rate to gauge an appropriate amount for business loans.
The prime interest rate is generally used as a starting point for lenders, who will typically add a few points extra depending on your business, the loan you apply for and other external factors. Therefore, you can almost always expect the interest rate on your small business loan to be higher than the prime interest rate.
Borrowers with an ongoing and successful organization might seek out a different loan structure than someone looking to get their business off the ground. Before you know how much you’ll be able to borrow, you’ll need to decide what type of VA small business loan works best for you.
Types of small business loans for veterans:
The SBA offers a number of programs designed to help veterans sustain their small business or get their operations off the ground. Here’s a look at some of the most popular VA small business loan options and how they might suit your situation:
- SBA Standard 7(a) loan program
- SBA Express Loan
- Military Reservist Economic Injury Disaster Loan (MREIDL)
- SBA Microloan
- SBA 504 Loan Program
SBA standard 7(a) loan program
If your business is already up and running but you’d like to consolidate some debt, finance working capital or purchase an investment property, you might benefit from the Standard 7(a) loan program.
These loans are not intended to fund a startup, as you’ll need to have been in business for at least two years to qualify. In addition, the business will need to produce a healthy cash flow for your lender to agree to the loan. The quality of your personal credit score will also factor into your loan’s approval.
The approval standards for this lending program might be high, but eligible applicants will benefit from low monthly payments, comparatively low interest and long-term repayment schedules.
SBA Express Loan
One of the more popular lending options for veterans is an SBA Express Loan. As its name suggests, this loan features an expedited application process and can be applied to loans up to $350,000.
An SBA Express Loan will guarantee a maximum of 50% of the loan’s principal. As a derivative of the 7(a) loan program, this type of financing is also intended for ongoing businesses that are looking to acquire an asset, purchase real estate, cover working capital or pay for a number of other hefty business expenses.
Military Reservist Economic Injury Disaster Loan (MREIDL)
Another VA small business loan available to established companies is the Military Reservist Economic Injury Disaster Loan, or MREIDL. This loan provides financial relief for functioning businesses whose owner or essential employee is called up for military service.
Successful veteran-owned businesses can be hampered by the absence of their primary owner, which is why MREIDLs primarily finance the working capital needed to keep the business on track. This type of loan provides this capital until the return of the essential employee. Depending on your individual eligibility status, these loans may not require upfront fees and can provide a 50% loan guarantee.
SBA Microloan
VA small business loans aren’t all designed for previously established businesses. If you’re still trying to get your idea off the ground, an SBA microloan could help. The maximum for these loans is $50,000, and typically come with an interest rate between 8% and 13%, according to GovLoans.gov.
In order to be approved for a microloan, you’ll need to submit a significant amount of documentation. Before you decide to pursue an SBA microloan, be sure you have access to the following documents and plans in order to secure your eligibility:
- Detailed business plan
- Relevant tax returns
- Profit & loss statements
- Operating budget and financial projections
- Business owner resumes
- Credit report statements
- Articles of incorporation
- Business licenses & permits
These loans can be used to finance any aspect of business expenses that is not a real estate purchase or debt consolidation.
SBA 504 loan program
If your small business is lagging a bit in updated equipment, or some new asset would really benefit your bottom line, the SBA 504 loan program may provide some assistance. These long-term loans feature a fixed interest rate, meaning your interest payments will not change throughout the life of the loan.
40% of the funding for 504 loans come from the SBA’s Certified Development Corporation. The remaining balance comes from an approved lender and the borrower, who contribute 50% and 10% of the loan respectively.
Am I eligible for a VA small business loan?
In order to be eligible for a VA small business loan, you’ll have to fall into one of the following classes of military personnel:
- You were honorably discharged from service
- You are a service-disabled veteran
- You’re an active-duty service member & eligible for the Transition Assistance Program
- You’re active reserve or a National Guard member
- You are the current spouse of any veteran or service member
- You’re a widowed spouse of a military member who died in service
In order to secure a VA small business loan, your company must also be at least 51% owned by an eligible veteran. If you’ve received a dishonorable discharge from the military, you will not be able to qualify for this type of lending. Be sure to check with the VA for your official discharge status.
In conclusion
The SBA offers a variety of loans and financial assistance programs to help military members run a successful small business. This financing is not provided by the SBA themselves, so be sure to work with a qualified lender with experience in VA small business loans.
For more information on how the government can provide financial assistance for military members and their families, learn more about VA mortgages.
Disclaimer 1: This product is not offered or brokered by Rate Companies.