EXECUTIVE SUMMARY

Continued deployment of National Guard and Reserve military personnel in the Global War on Terror who are also business owners is creating additional hardships on those reserve component service members than their non-business owner/self employed counterparts.  Continued deployments of this sub group of Guardsmen and Reservists has resulted in numerous business failures, losses of business income, bankruptcies and economic losses to their enterprises that have created undue hardships on their civilian careers.  The playing field between reserve component business owners and non military business owners is no longer even and their service to their country is resulting in significant losses in their civilian careers.

The SCRA especially in terms of its impact on interest rate caps for pre deployment loans does not differentiate between consumer related loans and business loans although the wording of the act does not appear to prohibit its application to business loans.  However service members who own their own businesses also have pre deployment business debt that is not clearly identified in the wording such as revolving lines of credit, business term loans, business credit card loans, equipment leasing or accounts receivable factoring, all of which are critical to sustainment of most business endeavors.

SCRA clarification for commercial lenders as to their obligation to business related loans needs to be more clearly defined, service members who are business owners need to be identified by command prior to deployment and access to consulting/counseling business assistance needs to be provided that targets their debt obligations and options available to the service member to reduce the negative impact of servicing those loans upon their return from active duty.  SCRA time limits on removal of the 6% cap need to be expanded for business owner service members upon return from active duty to ensure best possible opportunity to get their businesses back to pre deployment levels of revenues and customer bases to ensure they can service the debt.

Commercial lenders need further education on the SCRA and its impact specifically to small business owner service members and be provided with tools to help them provide the best possible alternatives to assist those customers retain a viable business upon return from deployment.  Some confusion exists among commercial lenders as to the scope and applicability of SCRA to business owners who are called to active duty.

Current assistance to service related business owners called to active duty is inadequate to help keep them operational or to help them rebuild upon deployment.  U.S. Small Business Administration programs aimed specifically at veterans and reserve component business owners has improved but is still not sufficient to meet their needs.  Patriot Express guaranty loan programs are not available to many commercial lenders and needs to be expanded to allow smaller community banks to access the program.  Additionally the SBA direct loan program for military service members EIDL (Economic Injury Disaster Loan) direct loan program is only a stop gap at present time and is limited to working capital.  The EIDL should be expanded to help refinance existing business related debt, provide deferments on repayment until a reasonable time after redeployment and be expanded to include needs other than working capital

Servicemembers Civil Relief Act (SCRA) and its Impact on Reserve Component Business Owners

In 1777 the commanding general of the British forces in North America summarily dismissed concerns expressed by his staff about the quality of the colonists’ military force as “an army of peddlers and shop keepers”.  Those militia “small business owners” went on to defeat that super power, win our nation its freedom, and have continued to serve as our National Guard and Reserves in every major conflict since then.

The continued deployment of our nation’s reserve component since 2003 is unprecedented in modern times.  Not since World War II has the nation’s National Guard and reserves been called upon to mobilize and deploy to supplement the country’s armed forces in combat operations overseas to this level.  As the subcommittee is well aware these continued deployments on our nation’s national guard and reserves have created great hardships on these citizen soldiers, their families and their civilian careers.

Nowhere is this more evident than in the challenges that our reserve components “peddlers and shop keepers” face.  The impact of continued deployment on those military personnel who are business owners or self employed is a critical issue that deserves congressional assistance.  The U.S. Small Business Administration estimates that at least 7% of all reserve component service members are self employed or sole proprietors.  When the number of service members who are involved in other business entities is included (those in partnerships or with substantial ownership in privately held corporations such as Sub Chapter S, C Corporations or Limited Liability Companies) these percentages of impacted members increases significantly.  Estimates range from 10% to 14% for the number of service members involved in some form of business ownership.  While these are a relatively small proportion of all Reserve Component service members, these individuals tend to hold critical “mid-level” positions in their units.  While retention of all military members is of great importance to sustaining our armed forces, the potential loss of many of these key leaders would be detrimental to the deploying units.

Small business owners who are members of our National Guard and Reserves face additional challenges as they prepare for continued deployments overseas for extended periods of time.  In addition to the personal and family issues that must be overcome these service members also must make hard decisions about their business operations.  Unlike their fellow soldiers who are guaranteed their jobs by their employers, no such guaranty exists for these small business owners.  When the yellow ribbons are taken down and the parades are over this sub set of service members must deal with the often negative consequences that their absence has had on their livelihood. 

Because of the nature of their businesses, the deploying service member is generally the key management person of that business and his or her extended deployment causes severe problems as they attempt to rebuild their businesses.  Many have been forced to close their businesses during deployment or to have family members attempt to sustain it while they are on active duty and the majority find that the loss of revenues and loss of their customer base upon their return makes return to pre-deployment levels of operations a significant challenge.  For many of these citizen soldiers the result of their decision to serve their country results in a level of sacrifice and loss far greater than that of their non-business owner fellow service members.

While the Servicemember Civil Relief Act has proven itself to be a significant piece of legislation aiding many deploying service members, especially in terms of pre-deployment debt obligations, its protection to these small business owners seems to be of limited value and is not uniformly understood by all commercial lenders.  While the Act does not have specific language differentiating consumer loans from business loans, it does create confusion among some commercial lenders as to whether it even applies to business loans.

The majority of all small businesses have to operate on some form of debt financing.  Whether this is in the form of term loans, revolving lines of credit, accounts receivable factoring, equipment leases or business credit cards, commercial loans are a fact of life for most businesses to succeed.  Unlike consumer loans (home mortgages, auto loans, credit cards, etc.) that are paid for by the borrower from wages and salaries received by their employers, commercial business loans must be repaid from the revenues generated by these small businesses.  12-15 month deployments of business owners results in losses of revenues which in turn impacts their ability to meet their financial obligations to their lenders.

While the 6% cap of interest rates required by the SCRA are invaluable to many service members as they face decreased household income due to their military deployment, even this reduction is often not enough to allow that returning business owner to deal with the challenge.  When a business owner losses a significant part of ongoing revenues due to his or her deployment even a 6% cap is not sufficient to keep that business afloat. 

At a minimum all service members called to active duty who are business owners should be identified and they should be made aware of how SCRA can assist them with business debt.  These service members must have access to individual counseling assistance at no charge who are able to review their business financial position, their current business debt schedules and work out plans to assist them in meeting with lenders to implement SCRA requirements as they currently exist. 

More emphasis must be placed on educating commercial lenders especially those involved in business related loans of their obligations under SCRA to help these deploying business owners with their debt issues.  Discussions with loan officers from a number of financial institutions around north central and Northeast Arkansas indicates that they are not fully aware of their responsibilities under SCRA to deploying business owners. 

However, the benefits available under SCRA as it is currently written are not sufficient to help those returning service member business owners deal with the challenges of rebuilding their businesses.  SCRA allows the lender to return loans to pre-deployment interest rate levels upon release from active duty.  While this is not as significant an issue to returning service members who are returning to their old civilian employers and thus to their pre-deployment income levels, for most small business owners rebuilding revenues and customers to the pre-deployment levels is not an overnight proposition.  It often took years for that business person to build his or her revenues to its pre-deployment level and will take significant time for them to return to those levels after deployment ends.  At a minimum continuation of the 6% interest rate cap for business loans should be allowed to continue for a reasonable amount of time after the business owner returns to civilian life to help rebuild their business.

Another issue that is not adequately addressed with SCRA is in the scope of the enterprises that would be covered under the 6% cap.  While as written it impacts both the deploying service member and his/her dependents it does not address those business owners who are involved in partnerships where they are partial owners in the business but their departure has a significant negative impact on the partnerships earning ability and thus ability to service business debt.  As example a 3 person medical clinic where one of the three partners is a reserve component service member and is called to active duty, while the other two members may not be service members, that departing individual is a significant contributor in civilian life to the overall revenue stream of the business and thus to the ability of the partnership to meet their contractual debts.  Assuming that all three partners co-signed for business debt, even though that deploying member is only a 1/3rd owner, the business should have access to the same interest rate cap as if that individual was a sole owner.

Finally, although outside the scope of the SCRA as it is currently written the subcommittee should give consideration to changes or additions to the Act that will further help reduce the negative impact of business ownership on these service members.  For many small business owners even a reduction of interest rates to 6% on their business loans is not sufficient to help their business survive the deployment and regain lost revenues or customers.   It is strongly suggested that Congress review possible legislation that would facilitate “banking holidays” for those deploying service members whose businesses will not be able to be sustained during their deployment even at the 6% cap.  Obviously commercial lenders are not in a position on their own to provide these total payment deferments for the period of the deployment without some type of governmental involvement such as providing some form of guaranty on these loans similar to U.S. Small Business Administration guarantees or other governmental guaranty programs.  Another option is the possible expansion of the current SBA  disaster direct loan program Economic Injury Disaster Loans  (EIDL)  for deploying small business owners that would allow the government to “buy out” the loans from the lenders and set up terms that would benefit the service member.

The U.S. Small Business Administration has made significant improvements on their loan assistance programs aimed at veterans and reserve component service members through their Patriot Express programs and the EIDL direct loans; however these initial moves need to be significantly enhanced to ensure our business owner service members are able to operate on a par with non military businesses.  The Patriot Express loan is limited to those commercial lenders who are already members of the SBA Express loan program and in Arkansas only a very limited number of larger banks are able to use this program.  Small community banks do not have access to this program and thus are not able to provide the assistance with the SBA guaranty to their service member customers.

Additionally the Economic Injury Disaster Loan program through the SBA while beneficial to those service members who qualify is limited to working capital needs and does not include the ability to refinance existing commercial loans nor to provide loans for equipment, inventory, or other normal business loan needs.

Reserve component business owners find themselves at a significant disadvantage economically and through access to capital that significantly cripples their ability to keep their business operational while deployed or to recover upon return when compared to their non-service member competitors.  Banking requirements also make it difficult for individual banks to make deferments or other assistance to their reserve component business customers without some form of governmental assistance.

In conclusion, small business ownership is and remains the bedrock of our economy and studies from the Small Business Administration show that veteran owned businesses are significantly more likely to be formed and to succeed than their non-veteran counterparts. However, continued deployment of this significant subgroup of our reserve component in the Global War on Terror has created a tremendous barrier to their normal civilian operations far in excess of that faced by non-business owner service members or their non-business owner fellow service members.  I urge the Subcommittee on Economic Opportunity of the House Committee on Veterans’ Affairs to give consideration to the current level of assistance available to reserve component business owners under the SCRA, to look at expansion of assistance under SCRA that addresses unique lending needs of these service members and to consider alternative forms of direct governmental assistance to allow these citizen soldiers to remain on a level playing field as they strive to keep their business enterprises viable.