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SBA Community Advantage 7(a) changes will impact veteran-owned businesses

January 12, 2018 / Sadaf Knight / Small Business

In North Carolina, veteran-owned businesses account fro almost 11 percent of all businesses in the state. A vast majority of them are very small, with 82 percent of veteran-owned businesses having fewer than 20 employees. These businesses account for 8 percent of all employment and generate $4.7 billion in annual payroll.

Despite their impact, veteran business owners face barriers in accessing the capital and resources they need to support their business ventures. Between 1996 and 2014, the percentage of new entrepreneurs who were veterans decreased from 12.5 percent to only 5.6 percent. Veterans who served in wars after 9/11 are much less likely to start a business, compared to veterans of other wars. One of the challenges is translating the skills acquired during military service into civilian live.

To meet the needs of veteran business owners, Carolina Small Business offers a Veterans Direct Loan Program, which is a zero-equity-required program. This means that veteran business owners (or business owners who are spouses of veterans) do not need to put any of their own money down in order to get a loan. Our motivation behind this feature is that our veterans, through their service to our nation, have already provided their equity and through this program we can help them achieve success in civilian life.

Carolina Small Business is also a Small Business Administration (SBA) Community Advantage 7(a) lender, which means that for certain loans that qualify, the SBA will provide up to an 85 percent guarantee. This is very helpful for small businesses who often struggle to meet the collateral requirements for obtaining a loan. The guarantee allows us to extend a loan to these business owners.

For veteran business owners, the Veteran Direct Program, along with the SBA guarantee, can provide the right kind of support. Our lending team estimates that 80 percent of the loan applications and inquiries we receive from veterans is because they are interested in our Veteran Direct Program. Furthermore, almost one-quarter of our SBA guaranteed loans are for veteran-owned businesses.

However, changes made by the SBA mean that we may not be able to offer this feature to some veteran loan applicants. The SBA previously allowed lenders to establish their own equity requirements. As such, we could offer the zero-equity feature for veteran loans that also had the SBA backing. Recently, the SBA changed the regulations to require that all SBA-backed loans include a 10% equity payment from borrowers. What this means is that we can no longer pair or Veteran Direct Loan Program with the SBA guarantee.

Furthermore, the SBA also changed its fee structure. Previously, loans exceeding $150,000 had a fee of 3 percent of the guaranteed portion of the loan. Veterans would only have to pay 1.5 percent. Now the SBA has added a fee for loans in amounts between $125,000 and and $150,000– 2 percent of the guaranteed portion for non-veteran loans, and 1 percent for veteran loans.

These changes will hamper the ability of mission oriented lenders to develop programs, like the Veteran Direct Loan Program, that meet the needs of specific types of small business owners. Our goal is to reduce the barriers that small business owners face, particularly for those who have been long underserved and face disproportionate challenges. Before making such changes, the SBA should consider how they will impact the businesses and communities that participating lenders serve.