It stands as one of the most famous economic programs in U.S. history, and it helped created modern middle-class consumer culture — the same culture that many observers now worry is on its way out. Enacted in 1944, the Servicemen's Readjustment Act — you likely know it as the G.I. Bill — provided returning veterans of World War II not only education grants and low-cost mortgages, but low-interest business loans for any would-be entrepreneurs.
Passed in part to avoid political controversies and violence that stemmed from the bonuses earmarked for Word War 1 vets (this year’s Veterans Day, in fact, marks 100 years since the “War to End All Wars” ended), the G.I. Bill still entices young people to join the military, and still benefits veterans after they leave service.
But a new report from the Federal Reserve Bank of New York and the U.S. Small Business Administration has found that businesses owned by veterans have a harder time getting financing. That would seem to reverse a longstanding trend of more veterans being self-employed than other part of the population.
SMB Financing Woes
The report, entitled “Financing Their Future: Veteran Entrepreneurs and Capital Access,” comes amid other news about the challenges that owners of smaller business have with financing — and payment and financial services firms, along with some banks, stepping up to that business opportunity.
The report about veterans found that in 2017, they were less likely than in previous years to win access to the funding they sought on favorable terms, including lower rates. Factors behind that trend include the relatively smaller sizes of veteran-owned businesses compared to others. As well, according to the report, veteran-owned businesses tend to underperform other businesses — for example, when it comes to businesses with one to four employees, the report said, those owned by veterans tend to have average annual sales that are 16 percent lower than firms owned by nonveterans.
Veterans, too, tend to ask for smaller loans than do other business owners, another reason for the relative lack of financing approval, the report said. “Given that a greater share of veteran-owned businesses sought $100K or less, one possible explanation for the lower approval rates, particularly at larger banks, could be a mismatch in the lender from which financing was sought and the lender most likely to approve smaller loan amounts,” the report said.
Veterans as Entrepreneurs
Younger veterans are less often working as entrepreneurs than their older predecessors. “In 1998, 16 percent of veterans in the labor force were ‘self-employed,’ compared with 12 percent of nonveterans,” the report said. “In 2018, that same rate had declined to 11 percent for both veterans and nonveterans (a 33 percent drop for veterans compared to a 9 percent drop for nonveterans).”
One reason behind that decline could be considered positive for veterans, and for the national economic culture. The unemployment rate for young veterans has declined over the last decade, the report said, “possibly aided by major corporate initiatives to hire more veterans,” which, in turn, “could be playing a role in the declining rates of veteran entrepreneurship, as more veterans seek to work for companies.”
Even so, the report said that up to 25 percent of people leaving military service desire to start their own businesses, with reasons that include the relative independence of such work, and “dissatisfaction with the civilian workforce due to disorganization and limited opportunities to showcase skills.”
But while veterans can often band together and help build businesses together, or help grow an industry — look at what Israeli military and intelligence veterans have done in private industry with payments, data security and associated areas — being away from civilian life for an extended time has its drawbacks when it comes to entrepreneurship.
As the report noted, “75 percent of the veteran entrepreneur respondents reported encountering challenges as they were starting and growing their business. One of the most common reasons cited was social capital. Social capital in the form of networks and mentorships can be vital for entrepreneurial success, whether that means gaining investors, recruiting experts, or building your team.”
In fact, 50 percent of veterans move to locations other than their hometowns after finishing military service, the report said.
Veterans or not, small business owners face ongoing challenges with financing. As recently reported by PYMNTS, 61 percent of small business owners said they use commercial credit cards for B2B payments. That’s down from 71 percent in 2017, but the general trend is that millennial small-business owners are less likely than their older peers to use a business credit card, and more likely to use their personal card for business spend.
A recent study also found that a third of U.S. small businesses plan to raise financing in the next six months. The report about veterans found that even though they often submit more applications for financing than do other business owners, 60 percent of veterans who own small business have financial shortfalls. That compares to 52 percent of business owned by nonveterans.
What happens to veterans, historically, can have a significant impact on events and on the development of societies. One can argue that the path to World War II was largely paved by the anger and resentments and limited prospects of German veterans of World War I (and Hitler was one of them, as were many early Nazis). This new veteran report about financing and entrepreneurship suggests nothing so dire, of course, but in reading between the lines and looking past the numbers, one is reminded of how what happens to people after they have fought in war or otherwise served can have wide economic and cultural impact.