SBA loans are one of the most popular loans among small business owners. The Small Business Administration’s (SBA) goal is to provide affordable financing to those who can’t get it elsewhere. Those who qualify enjoy low interest rates, long repayment terms, and high loan amounts.
However, SBA loans are highly competitive, and lenders deny more applications than they approve. If you’ve been denied an SBA loan, know you’re not alone.
In this article, we’ve outlined the common reasons an application is denied and what you can do about it.
The Small Business Administration (SBA) offers SBA loans to small business owners who do not qualify for loans at other financial institutions. But the competition for SBA loan applications is fierce, so it’s crucial that you’re putting your best foot forward.
Lenders usually deny SBA loans if the eligibility requirements are unmet or the documentation is incomplete. You can find the SBA’s terms, conditions, and eligibility here.
If the SBA denies your application, you could file an appeal within 45 days of receiving the verdict directly to the Small Business Administration’s Office of Hearing and Appeals.
Most Common Reasons Why Lenders Deny SBA Loan Applications
Lenders check several factors when reviewing your loan application. They usually deny it if the documents are incomplete or the eligibility requirements are not met.
It’s important to note that the SBA provides financing through accredited lenders, and the requirements may vary depending on the lender you’re working with.
Here are the SBA’s basic requirements for loan applicants:
You must be operating in the United States or its territories.
You, as the owner, should have invested equity.
The company should be registered as a for-profit business – a sole proprietorship, limited liability company (LLC), or limited liability partnership (LLP).
You have tried applying for other financing options but got denied.
Other Factors Lenders Look at When Evaluating Your Application
While the SBA does not have a minimum credit score requirement, it’s recommended that your credit score is in the mid to high 600s when you apply. The higher your credit score, the higher your chances of approval.
Your credit score weighs heavily when applying for business loans, so check your creditworthiness before applying for an SBA loan. You can request a free copy of your credit report from Equifax, TransUnion, and Experian at AnnualCreditReport.com or call toll-free at 1-877-322-8228.
Business Size Standards
SBA loans are only available to companies that fall under the SBA’s business size standards. To qualify, businesses need to generate a certain amount of revenue and employ a certain number of employees.
Business owners must have equity injected into their businesses; otherwise, their loans may be declined. The SBA typically requires an equity injection of at least 10% of the total cost for startups (less than a year old) or 10% for a change in ownership. However, there are exceptions, so be sure to talk to your lender for questions and clarifications.
Capacity to Repay the Loan
Lenders will assess if you can repay the loan when reviewing your financial documents. They’ll look at your tax returns, cash flow projections, collateral, bank statements, and other financial documents. You can sometimes appeal your denied SBA loan application if you show your capacity to repay the loan.
Other Eligibility Issues
Other eligibility issues that can affect your application are the following:
The need for funding
Lack of business history/startup
Next Steps: Appeal Your Denial
You can file an appeal depending on the reason for your loan denial. The SBA will review and decide on the appeals through the Office of Hearings and Appeals (OHA). Here’s what you need to do to appeal your denial:
Understand Why You Were Denied
Before you file your appeal, it’s crucial to understand why you were denied so you can provide accurate information. Knowing the reason gives you insight into areas to improve before you can appeal or reapply.
Keep in mind that there are many reasons why your loan was denied. If you’re unsure why your application was rejected, talk to your lender to determine the cause.
Gather the Necessary Documents
You’ll need to gather the necessary documents to back up your claims, such as a copy of the determination for the SBA loan and other supporting documents. Let’s say your application was denied because of your business size. When appealing the SBA’s decision, be sure to bring payroll documentation that shows the number of employees in your company fits the SBA’s requirements for a small business.
File Your Appeal
File your appeal through the Hearings and Appeals Submission Upload Application. Be sure to include a description of the filing (e.g., type of appeal and protested concern). Generally, you need to file your appeal within 45 calendar days of receiving the denial, but some SBA loans may need to be filed within 10 to 20 days. Appeals usually take three months to process.
Don’t forget to include important documentation and follow instructions, like bringing certificates of service or reaching out to other SBA departments.
Pros and Cons of Cash Flow Loans
Streamlined and automated applications. Online lenders are usually the ones that issue cash flow loans, and they offer a fully-automated, streamlined process. In most cases, you can complete the application in less than 10 minutes with minimal documentation required. Cash flow lenders often ask borrowers to connect their financial accounts to their platform so they don’t have to submit documents.
Flexible requirements. Since lenders are more interested in your historical and projected business revenue when reviewing your application, they’re more lenient compared to traditional bank loan requirements. However, keep in mind that requirements vary depending on the lender.
Fast funding. Traditional banks and credit unions often take weeks or months to release the funds. If you need a fast business loan, cash flow lenders can approve and fund your business within 24 to 48 hours.
No collateral is needed. You don’t need to pledge your personal or business assets to secure a cash flow loan since lenders only need to check your cash flow.
Higher interest rates and fees. Since lenders don’t ask for collateral and rely heavily on your business's cash flow to make a decision, they typically charge higher interest rates and fees to offset the risk.
Short repayment terms. The repayment schedule for business cash flow loans is usually short and may require frequent daily or weekly payments. This can be difficult to manage, especially for seasonal businesses or those struggling with cash flow. If you’re not careful, you might get trapped in a cycle of debt.
Automatic payments. Some cash flow lenders may require automatic payments to reduce the risk they will take. However, this can be challenging if you already have cash flow problems. Depending on your agreement with the lender, payments can be fixed or varied and can be taken out of your account daily, weekly, or monthly.
How to Improve Your Chances of Approval the Next Time You Apply
If you haven’t been approved for an SBA loan or your appeal has been denied, the next step is improving your business so you can eventually qualify. For example, if you’ve been denied because of your credit score, you can review credit reports, refute any errors, pay dues on time, and keep your credit utilization rate low to increase it.
Here are a few ways to boost your chances of approval if you choose to reapply for an SBA loan:
Improve Your Business Financials
Aside from your credit score, the Small Business Administration checks your business and personal finances. Since they partially guarantee the loan, they want to make sure you’re able to repay it. You’ll likely be approved if your business generates revenue and has healthy cash reserves.
The SBA also checks your personal finances, especially if you don't have a business credit history. They evaluate how your financial situation may affect your business, so they may deny your application if you’re overloaded with debt, have fluctuating income, or have a low credit score. The key is to demonstrate that you can afford to repay the money you’re going to borrow.
Build Up Your Business and Personal Credit Scores
Since the government guarantees SBA loans, they usually have stricter credit score requirements than other types of loans. The minimum credit score varies depending on the type of SBA loan you’re applying for, but having a really low credit rating is one of the most common reasons for SBA application rejections.
The minimum credit score requirement is typically around 680. If you have poor credit, you may need to wait a few months and try to improve your score or have strong business credentials to qualify, like generating significant yearly revenue or being in business for several years.
Before you reapply for an SBA loan, work on your personal and business credit scores to increase your chances of approval.
Wait a Few Months
Sometimes, the best thing you can do is to wait.
SBA loans are open to everyone, including new businesses, but they face the most denials. The main reason is that startups haven’t been around long enough to prove that they’re capable of repaying the loan. They’re still navigating the waters and figuring out how to generate profit. The SBA and SBA-accredited lenders would rather work with more established companies with positive financials.
You need to wait a minimum of 90 days before submitting another SBA loan application. Use that time to improve your credit score, boost your business cash flow, and improve your financials so you’ll have a better chance of qualifying the next time you apply.
Remember: The SBA loan approval process can be tedious and time-consuming. Before applying, make sure to do everything you need to improve your business and meet all eligibility requirements.
Alternatives to SBA Loans
Other financing options are available if you don’t meet the SBA’s criteria or need immediate funding. Here are some SBA loan alternatives to consider:
Many online lenders offer to finance borrowers who have been denied an SBA loan or a bank loan. Even small business owners with a credit score of 500 can obtain financing.
Here are some of the financing options offered by nonbank lenders:
Purchase order financing
Merchant cash advances
Business lines of credit
Business Credit Cards
Business credit cards are a great option if you’re looking to build business credit since you’ll be able to separate your personal credit from your business. Just like your personal credit card, business credit cards offer rewards and benefits that can help grow your business.
Choosing the best credit card depends on your company’s goals and spending habits. Evaluate your business and consider those when comparing features like travel points, 0% intro APR periods, cash back, and more.
Angel investors are private investors that fund small businesses in exchange for equity, so you don’t need to repay the money invested. These investors usually work with established companies beyond their startup years and show potential for high profits but still need capital to grow. Since their money is on the line, angel investors mentor or offer direct management assistance to help you succeed.
You can find angel investors on the following platforms:
Small Business Grants
Small business grants are “free money” offered by businesses or organizations. They’re free because they freely give it to deserving companies that fit their criteria. Credit scores and the number of years in business aren’t usually a factor, but grants are highly competitive and can be difficult to qualify for.
Being denied an SBA loan can be discouraging, but it is not the end of the road. You can take several steps to improve your chances of being approved for a loan in the future.
Firstly, make sure that you understand the most common reasons why lenders deny applications. Secondly, improve your financial situation and strengthen your credit scores. Lastly, consult with a professional who can help you navigate the process and increase your chances of success.
By following these tips, you will be well on your way to securing the financing you need for your business.