In addition to any insurance coverage they might have, business owners and individuals alike that have been affected by a declared natural disaster, can apply for an SBA disaster loan. SBA disaster loans are designed in a way that enables small business owners and individuals to recover from a natural disaster without the occurrence of financial hardships. What’s attractive about these loans is, they come with both low interest rates and long repayment terms.
With that in mind, here are the top 5 reasons that your business might not be eligible for an SBA disaster loan.
Previous Borrowing History
Many business owners and individuals have borrowed from lenders, credit card companies, or even the SBA in the past. The borrowed funds were used for a variety purchases, such as a car, a home, with numerous more using their credit cards to pay for day to day expenses. All lenders check your personal and business credit scores. If you have any previous defaults, modifications, or have shown an inability to pay previous creditors, the SBA is probably going to deny your application for a loan.
In order to qualify for an SBA disaster loan, your business must be an operating for profit entity. If your business is registered as either a publicly traded company, a non-profit entity, or a foreign registered entity, this status will automatically make you ineligible to apply.
Personal Credit Score
Although the SBA disaster loan programs are designed to help business owners and individuals who need financing, if a company or individual is considered a sub-prime candidate and have less than a 660 FICO score, they will also be ineligible for an SBA disaster loan. Demonstrating your ability to pay back a loan to the SBA is a crucial part of the underwriting process.
In addition to having an above average credit score, the SBA will require collateral for an SBA disaster loan. This is similar to many of the programs they offer to small business owners, such as the SBA 504 and SBA 7(a) loan programs.
Your personal credit score will show the SBA that you pay your bills in a timely fashion. By looking at the historical cash-flow of your business, the SBA will be able to determine if you are in a position to support additional debt on a moving forward basis. Typically, they will look at your ability to service debt through a debt service coverage ratio, or a DSCR. The minimum acceptable DSCR over the previous 3 years will be in the 1.10 to 1.15 range. The higher the number, the stronger the cash flow. An historical cash-flow analysis is the best way to determine what the future cash-flow of a business will look like.
SBA Disaster Loans Conclusion
To learn more about the disaster loan program, click here for an in depth overview of the different types of SBA disaster loans that are available to both individuals and small business owners.
If you are of the belief that you may not presently qualify for an SBA disaster loan, the inside experts at SMB Compass can help. We’ve helped hundreds of small business just like you all across the country, and we are confident our specialists can help you too!
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