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Report: Veteran entrepreneurs face more acute financing shortfalls

The Business Journal - 12/3/2018

It cites smaller loan requests, higher credit risk, and lack of information as possible causes

The Federal Reserve Bank of New York and the U.S. Small Business Administration (SBA) on Nov. 8 issued a report, called "Financing their Future: Veteran Entrepreneurs and Capital Access." The report evaluates the state of entrepreneurship for military veterans by outlining current literature on veteran entrepreneurship, and presenting new small-business credit data from the Federal Reserve Banks' 2017 Small Business Credit Survey (SBCS).

The report found that, despite similar demand for financing, veteran-owned business applicants were more likely than nonveteran-owned business applicants to face "financing shortfalls," where they received less than the amount of credit they sought, according to a New York Fed news release. They also had lower approval rates at the most popular lenders, and the amount of SBA-guaranteed loans that they have received has increased more slowly over time than for non-veterans. The report explains that this discrepancy in financing experiences could be attributable to the smaller loan amounts that veteran-owned businesses seek, higher credit risk, and lack of information. Find the report at: (https://www. newyorkfed.org/medialibrary/media/ smallbusiness/2017/Report-on-VeteranEntrepreneurs-and-Capital-Access.pdf).

The 2018 SBCS is currently being fielded, and small-business owners can help further address information gaps on small business financing by taking this survey, per the release.

"To solve a problem, it's critical first to understand its scope. This report presents the most substantial evidence to date of the challenges veteran-owned businesses face in accessing capital," Claire Kramer Mills, New York Fed assistant VP, said in the release. "By understanding how much credit veteran-owned businesses are seeking, where they're applying, and the nature of their financing challenges, policy makers and service providers can better help veterans overcome financing shortfalls."

Larry Stubblefield, associate administrator of SBA's Office of Veterans Business Development, added, "Clearly, aspiring veteran entrepreneurs can benefit from preparation and training to start their businesses and succeed in the marketplace. This report highlights the value of SBA-partnered resources like the Boots to Business entrepreneurship training program, which helps veterans as they navigate the challenges in financing, starting and growing their companies."

Key findings from the report

Veterans are less likely to be self-employed today than in the past, according to U.S. Census Bureau data. When they do start businesses, most are small and often report lower sales. The labor force self-employment rate for veterans has declined 33 percent over the past 20 years, as compared to a 9 percent drop for nonveterans.

A majority (60 percent) of veteranowned businesses have 1 to 4 employees. These businesses tend to have lower sales than nonveteran-owned businesses of the same size, and this difference holds across industries, the news release stated.

Demand for financing was similar for veteran- and nonveteran-owned businesses (42 percent and 40 percent applied for financing, respectively).

Despite similar demand for financing, veteran-owned business applicants were more likely to experience a financing shortfall (60 percent) than nonveteranowned business applicants (52 percent).

The approval rates for veteran-owned business applicants for loans, lines of credit, and cash advances were about 10 percent lower than for nonveteran-owned business applicants, irrespective of the lending source.

Since 2010, SBA-guaranteed loans have increased by 48 percent for veteran borrowers compared to an 82 percent increase for nonveteran borrowers, per the release.

Reasons for finanang shortfall!

The report, with conclusions based /n naw aBCS and SBA Nata, prr sent/ three pv/sibk explandtians N/r the aiecrep anoy in funding outcomes for veterans and nonveterans: smaller loan amounts sought, credit-report concerns, and a need to seek advice when completing loan applications. The findings include:

* 60 percent of veteran-owned business applicants sought $100,000 or less in financing. Processing smaller loans can be costly for larger lending sources due to fixed transaction costs, so they may be less likely to approve these loans.

* 61 percent of veteran-owned businesses had high credit scores, compared to 69 percent of nonveteran-owned businesses. Also when firms were denied credit, veteran-owned businesses cited insufficient credit history or collateral as reasons more often (47 percent and 42 Ne//ent gespecüuely) ??? nEnveteran/wned Susmes/er th/ percent piic13c Ndtcent re spective/y).

* Veteran buninest ownere were more like-? to /rnbímt multiple loantpplicEtions, and yet had lower approval rates. pbservntioss by SBA officivl/indicate that business owners may lack understanding of, or lack preparation for the loan-application process.

Research conclusions and forward thoughts

Based on these conclusions, the report cites three ways policymakers and service providers could potentially help veterans overcome financing shortfalls.

* Encouraging an expanded focus on service to veteran-owned businesses through the Treasury Department'sCommunity Development Financial Institutions Fund, which supports lending to underserved segments;

* Pncvtneng mantorship OI?portuniti?a to aesisc veteran entreprensups m putting togpthnp business and finai/cmg stsategias betöre meeting with a lender; and,

* Raismgawarenesgag?nt the 0/^ nizations that are currently working to address

The Federal Reserve Banks' Small Business Credit Survey collects information about business performance, financing needs, and choices and borrowing experiences of firms with fewer than 500 employees. Responses to the SBCS provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses, according to the release. The results are weighted to reflect the full population of small businesses in the U.S. The SBCS is not a random sample, which may affect the results.

The SBCS includes experiences from businesses across all 50 states and the District of Columbia through the joint efforts of the Federal Reserve Banks of New York, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, Philadelphia, Richmond, San Francisco, and St. Louis. The 2017 SBCS collected 14,465 responses in total, 8,169 of which were from employer firms.

In this report, a business is considered to be veteran-owned if more than 50 percent of the business is owned by a veteran. Therefore, nonveteran-owned businesses also include businesses owned equally by veterans and nonveterans. In the 2017 SBCS, 6,922 respondents from employer firms shared whether they were veteranowned or nonveteran-owned. And 696 of those respondents were from veteranowned businesses.


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