Small business owners are no strangers to the challenges of securing a bank loan. Traditional lending companies are hesitant to loan money to small businesses because they think it’s too risky. Considering the importance of small businesses to the economy, the government stepped in and created SBA loans.
The Small Business Administration (SBA) created SBA loans to help small business owners secure bank-rate financing. The SBA is not the one loaning the money; they only guarantee up to 85% of the loan, which lowers the risk for SBA-approved lenders. This means that the government will pay lenders in case borrowers default on the loan.
These loans carry lower interest rates and lower repayment terms compared to other types of business loans. Additionally, you can use the funds for different purposes – buying real estate or equipment, for long-term working capital, inventory purchases, and more.
SBA loans almost sound too good to be true. But there’s a catch: not everyone is eligible for financing. Approval is not guaranteed even if you prepare a comprehensive business plan, demonstrate strong revenue, and have a clear need for the funding.
If you’re looking to apply for SBA loans, do know that approval is not a guarantee. However, to increase your chances for approval, it’s important to know the main reasons why lenders reject SBA loan applications.
1. You don’t have the right assets
Unfortunately, you won’t be able to secure 100% financing. Applying for SBA loans is similar to buying a house or a car; you’ll need to make a down payment to seal the deal. Lenders what to know that you’re in this together even though lenders provide the bulk of financing. Your relationship with your lender is a business partnership, so you need to pledge personal cash in the transaction. Many business owners think they can secure 100% financing, but it rarely (probably never) happens with SBA loans.
2. Your credit score is bad… although they may approve businesses with a history of bankruptcy
While the Small Business Administration doesn’t have a strict credit requirement, lenders still expect you to have good credit. After all, they’re lending you the money. Ironically enough, some lenders would still approve businesses with past bankruptcies, as long as it’s within good reason.
Most lenders prefer excellent credit for SBA loans, around 720 or higher. Your credit score reflects your payment history, whether you pay your bills on time or not. The credit requirements for SBA loan applications will vary from lender to lender. Keep in mind that even if you’ve gone through a bankruptcy, you can still qualify for an SBA loan.
3. You don’t have a strong cash flow
Your business’ cash flow is the first thing lenders consider when they evaluate your application. If your cash flow is strong, lenders may not ask you to provide collateral. However, not a lot of businesses have strong cash flows. Lenders need to see a strong cash flow that demonstrates you can cover daily business expenses, as well as SBA loan payments. Lenders need to see that you have a sufficient cushion in case your business fails.
Poor cash flow management is one of the main reasons why small businesses go out of business. Fortunately, there are ways to improve cash flow management. You can use accounting software to help monitor your cash flow on a daily, weekly, and, or monthly basis.
4. You have assets but you refuse to use them
The Small Business Administration requires borrowers to use other funding options, including your personal assets before you apply for an SBA loan. If you have excessive personal and business assets, you will have to use those first before using loan proceeds. However, you don’t have to financially suffer before you can apply for a loan.
The SBA is reasonable and they’re there to support you financially. They don’t want you to drain your finances. As mentioned, you may need to guarantee the loan with collateral – either with business or personal assets. You can pledge your equipment, home, or inventory as security in the event you were to default on the loan.
5. You previously defaulted on other government-backed loans
Your late student loan payments won’t look well on your SBA loan application. If you were late with your payments, you might have a hard time qualifying for a loan. Lenders need to see that you’re current with all the government loans to qualify for an SBA loan. This means that past defaulted government loans, (your student loans or any government-backed mortgages, for example), may disqualify you from securing financing from the Small Business Administration.
6. Your industry is risky
The level of your industry’s riskiness depends on the lending institution. There are numerous reasons why your business is considered risky. For example, businesses that operate within the“vice” industry, such as gambling, may pose extra hurdles for borrowers and lenders. When choosing an SBA lender, be sure to ask whether your industry qualifies or not. If it doesn’t, you can look for a different SBA-approved lender.
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Getting rejected for SBA loans in times when you need it the most can devastate your business. However, you shouldn’t lose hope just yet. There are a lot of other businesses that have been in your place at some point, too. Even they ended up succeeding in applying for an SBA loan. With that, it’s always important to know the reason behind the rejection so you can work hard in correcting it. By the time you reapply for an SBA loan, you’ll then have a higher chance of getting approved.