Was Your SBA Disaster Loan Denied?

Here’s Everything you Need to Know

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    In a time of economic distress, it can be frustrating to find the right financial support that helps you stay in business. More specifically, if you’ve applied for a small business loan such as an SBA disaster loan and it was denied, where do you go from there?

    If you’ve recently had your SBA disaster loan denied, we’ve created this guide to help you move forward. We’ll uncover the different reasons why your application may have been rejected, detail the steps you can take to re-apply, and highlight alternative options you can consider getting funding.

    Key Takeaways

    • There are a number of reasons why your application for an SBA disaster loan is denied. This could mean your paperwork needs a rework, your credit score is not high enough, or your business industry is too risky to invest in.
    • When applying for an SBA disaster loan, make sure that you’re working with a lender who specializes in your industry and business size.
    • If your SBA disaster loan got denied, you can appeal it to the SBA. We provided steps on what you can do to appeal a denied loan.
    • Having your SBA disaster loan denied won’t necessarily affect your credit score. This will not be recorded in your credit report.

    Why Was Your Application for an SBA Disaster Loan Denied?

    There’s a myriad of reasons why your application for an SBA disaster loan (or any loan) may be rejected. More common reasons are if you have poor credit or a poor credit history, your business lacks sufficient income, or has an excessive debt-to-income ratio.

    Further Clarification Needed for Your Documentation

    As a new business owner with no prior experience in applying for funding, completing all the necessary paperwork for your loan application can be daunting. One common reason for SBA disaster loan denials is incomplete or insufficient documentation, requiring further clarification, or missing necessary forms.

    The reality is that the SBA small business loan application process is lengthy and meticulous. Understandably, a new borrower may struggle to complete all the required paperwork accurately and comprehensively.

    To provide you with an overview, most lenders and banks will request a business plan, at least three years' worth of business and personal tax returns, bank account statements, financial projections for your small business, and your personal and business credit reports.

    In some instances, lenders may require additional documentation, such as legal documents, contracts, permits, licenses, patents, etc., to verify the legitimacy and credibility of your business.

    If you have been denied and are reapplying, we recommend reviewing the requirements you previously submitted to ensure you haven't missed any crucial documents for your application. You can also contact the SBA office directly to inquire about the necessary documents and avoid another denial.

    Unfavorable Credit History Impacts Your Application

    Maintaining a solid personal and business credit history is necessary for small business owners. Lenders utilize this information to evaluate your eligibility for a small business loan and determine your creditworthiness.

    According to the "Small Business Access to Capital Study" by the National Small Business Association, 20% of small business loan applications have been denied due to poor business credit.

    A more concerning statistic from the Nav American Dream Gap Survey reveals that 45% of small business owners are unaware of their business credit score, and 72% do not know where to access this information. Additionally, 82% do not understand how to interpret their business credit score.

    To better comprehend this, let's consider your personal credit history. It reflects your ability to meet monthly payment obligations, including credit card debts and bill payments. Lenders rely on this history to assess how responsibly you will manage the SBA disaster loan you are seeking.

    If your credit history is unimpressive, you will not receive a favorable credit rating. It's important to note that you need a credit score of at least 620 when applying for an SBA disaster loan. However, a higher credit score improves your chances of swift approval.

    Insufficient Collateral Offered

    Collateral refers to assets owned by you or your business that serve as security for your lender if you cannot repay your loan.

    The U.S. Small Business Administration (SBA) defines collateral as an additional form of security that assures the lender of an alternative source for loan repayment. Collateral is crucial as it reassures the bank or lender that they can either recover the borrowed money from you or in any other way beneficial to them.

    When applying for an SBA disaster loan of at least $25,000, you must provide collateral as a guarantee. Collateral can take the form of property, such as real estate, or it can be represented by your business's cash savings, equipment, accounts receivable, or inventory.

    What if you lack collateral? Unfortunately, collateral is typically necessary, particularly for larger SBA disaster loans. If you don't have sufficient collateral, you may consider federal grants as an alternative funding option to sustain your business during challenging times.

    Your Industry Presents Higher Risk

    The pandemic has impacted almost every industry, forcing businesses of all types to adapt their operations to lockdowns and safety measures. However, specific industries have been more severely affected than others.

    An extensive article published by S&P Market Intelligence highlights the five industries most affected by the global economic crisis: airlines, oil and gas drilling, restaurants, auto parts and equipment, and leisure facilities. Securing funding may be particularly challenging if your business operates within any of these industries.

    Moreover, some industries are inherently perceived as high-risk by lenders and banks, such as gambling restaurants and tech startups.

    If you believe that the reason for your SBA disaster loan application denial is related to the industry you belong to, research to find lenders specializing in your industry. Inquire about the supporting documents you can provide to demonstrate the trustworthiness of your business.

    Debt Utilization

    Lenders expect borrowers to utilize only 30% of the total credit. If you exceed this threshold, you may be considered overextended, raising concerns about your ability to repay the loan before the due date.

    For instance, if you were granted an $80,000 line of credit and have already utilized $70,000 of it, you may be seen as a higher risk. It's important to remember that your financial decisions are reflected in your credit history, which the new lender will review.

    On the other hand, underutilizing or not having any funding can also have negative implications for your loan application. While having no past debts demonstrates a lack of credit history, it also provides lenders with no basis to evaluate your repayment discipline.

    Furthermore, having credit diversity is beneficial. When applying for an SBA disaster loan, ensure that your credit history includes previous payments for business credit cards, lines of credit, personal loans, and other credit sources. Diversifying your credit sources gives lenders a better understanding that you can responsibly repay different types of funding.

    Inadequate Cash Flow for Your Business

    Cash flow refers to the net amount of cash or cash equivalents entering and leaving your business. Lenders typically evaluate your cash flow to assess whether your business generates enough income to cover expenses.

    Positive cash flow appeals to lenders, banks, and investors because it indicates solid financial flexibility. Conversely, poor cash flow management can raise concerns among lenders.

    Poor cash flow means your business struggles to increase liquid assets, meet monthly obligations, distribute profits to shareholders, cover expenses, and maintain a financial safety net during emergencies. Poor cash flow can lead to business failure if not addressed early on.

    Ready to apply for an SBA Disaster Loan?

    How to Appeal Your Denied SBA Disaster Loan

    You can appeal the decision if your SBA disaster loan application is denied. Here are some steps you can take to appeal your denied SBA disaster loan:

    Review the Denial Letter

    Carefully review the denial letter to understand why they denied your application.

    Request Reconsideration

    According to Cornell Law School, if they declined your loan application for reasons other than size, you can present information to overcome the reasons for the decline and request reconsideration in writing.

    Submit your request for reconsideration to the Disaster Assistance Processing and Disbursement Center (DAPDC) within six months of receiving the decline notice.

    File an Appeal

    According to the SBA, if your request for reconsideration is denied, you can file an appeal with the Small Business Administration's Office of Hearings and Appeals (OHA) within 45 calendar days of receiving the SBA determination being appealed. Ensure that OHA receives your appeal by 5 p.m. ET on the 45th business day. You can file your appeal by email at ohafilings@sba.gov or fax at 202-205-7059.

    Include Necessary Information

    According to SBA’s website, include a certificate of service when filing your appeal. This document shows that you sent a copy of your appeal to the appropriate parties.

    If you are filing an appeal of denial of program admission, suspension of program assistance, or denial of a request for waiver, in addition to OHA, you must also send your appeal to SBA’s Director of Business Development and SBA’s Office of General Counsel, Associate General Counsel for Procurement Law.

    Remember to follow the specific guidelines and timelines provided by the SBA for the appeals process. For more detailed information and specific instructions, please refer to the following sources:

    1. "SBA Disaster Assistance: Frequently Asked Questions." U.S. Small Business Administration. Accessed June 18, 2023.
    2. "Disaster Assistance Standard Operating Procedure." U.S. Small Business Administration. Accessed June 18, 2023.
    3. "Office of Hearings and Appeals." U.S. Small Business Administration. Accessed June 18, 2023.
    4. "13 CFR § 123.13 - How will SBA reconsideration or appeal my loan request?" Legal Information Institute, Cornell Law School. Accessed June 18, 2023.

    How Long Should You Wait After Appealing for a Denied SBA Disaster Loan

    Timelines will vary depending on the complexity of your application and the documents you’ve submitted. The SBA can get back to you between two weeks and several months, so you have to be patient. You can also follow-up with the office every once in a while to keep yourself updated on the status.

    Will a Denied Disaster Loan Application Affect Your Credit Score?

    No, a denied SBA disaster loan does not affect your credit score. Lenders may perform hard inquiries, which are detailed assessments of your borrowing risk, but the loan decisions themselves are not included in your credit history.

    Even if a hard inquiry temporarily impacts your credit score, it only affects a small portion—around 10%. These inquiries will disappear from your credit reports after two years. It's important to note that credit reporting agencies like Experian do not receive information about loan approval or denial decisions. However, lenders who review your credit report may see which companies have accessed your records for lending purposes.

    Remember, having multiple inquiries in the past may raise concerns for lenders as it indicates a higher level of risk.

    Ready to apply for an SBA Disaster Loan?

    With a Denied SBA Disaster Loan, What Else Can You Do?

    We’ve listed other ways you can get funding for your small business.

    1. Apply for a FEMA Grant

    If you tried appealing the decision for your denied SBA disaster loan, the most popular step is to get access to FEMA Grant Funding.

    What is FEMA?

    The Federal Emergency Management Agency (FEMA) is a government body that aims to “support the citizens and first responders to promote that as a nation we work together to build, sustain, and improve our capability to prepare for, protect against, respond to, recover from, and mitigate all hazards.”

    The organization provides a foundation for individuals to face adversities and recover from devastating disasters.

    What is a FEMA Grant?

    FEMA Grants are made available for qualified individuals for pre- and post-emergency or disaster-related projects. If you have been denied an SBA disaster loan, FEMA actually encourages you to apply for a grant. In fact, your appeal has to be formally denied to be eligible for any FEMA grants.

    Your lender might even refer you directly to applying for a FEMA grant as soon as your application for an SBA disaster loan is denied.

    Some of the disaster-related expenses that a FEMA grant can cover are your medical expenses, annual fund for planning and projects, earthquake insurance, floor damage reduction, facility retrofitting, cybersecurity, and sheltering..

    Your lender might even refer you directly to applying for a FEMA grant as soon as your application for an SBA disaster loan is denied.


    How to Apply for a FEMA Grant

    Here’s a step-by-step guide to applying for a FEMA grant, according to the organization’s website:

    1. Find a grant that suits your needs.
    2. Read through FEMA’s eligibility requirements and application process.
    3. If the grant has a cost to share with the applicant or recipient, evaluate if you can afford it.
    4. Determine your applicant type (ex. state or non-state, applicant or sub-applicant).
    5. Complete a benefit-cost analysis.
    6. Submit your application.

    2. Check Back Your Lender’s Requirements

    Lenders each have their own specializations. Some lenders can back you up if you’re in the restaurant business, while the others can provide you expert advice if you’re a start-up company.

    Double-check your current lender’s requirements and see if you’ve missed any information that led to your denied SBA disaster loan application. At best, you can ask your account manager to assist you in going through all your requirements and finding ways to complete them or make them more credible.

    3. Find Other Types of Funding that Will Meet Your Needs

    If you need cash quickly and you can’t wait for the SBA to get back to you with your appeal, it’s best that you start exploring other funding options.

    Check with your lender if you are qualified for other emergency business loans, or any other alternative funding from other institutions. We’ve listed a couple of options for you to choose from.

    Emergency Bank Loans

    A more traditional lending option for you is an emergency bank loan. Despite that banks have stricter lending qualifications and longer application processes, they can offer you lower interest rates and longer repayment terms.

    Just make sure to do your research first before applying for a bank loan because some banks don’t cater to relatively new businesses or those that are considered too risky.

    Business Line of Credit

    If you haven’t tried getting a business line of credit, this is one of the best times to do that. A business line of credit works like a credit card where you only repay what you use. A revolving line of credit can be acquired either from banks or private lending institutions and their requirements vary.

    With a business line of credit, the lender will approve you for a certain amount, which you can use whenever you need it. As you pay off your balance, your credit becomes available to use again.

    Having standby capital whenever you need allows you to have some level of financial cushion for growth opportunities, emergencies, unexpected expenses or any other expenses that need upfront payments.

    Emergency Bridge Loans

    Short-term emergency loans (or bridge loans) are designed to help remediate financing needs such as cash flow gaps, unexpected catastrophes, repair, and other expenses. The aim is to cover your capital shortfalls until you’re able to secure a more permanent funding, or until you’ve recovered from a disaster.

    Some of the most common types of bridge loans are operating and mortgage loans. Bridge loans can also be used to fund equipment repairs or purchases that will help you generate more income. It can also be used to hire new employees, increase inventory, or cover payroll.

    Invoice Financing

    Another proven financing option to accelerate your cash flow is through invoice financing. This type of funding allows you to sell your invoices to a third party company in exchange for upfront working capital. Your lender will give you up to 95% of the total invoice value. When your customers pay their invoices, you can pay off your advance plus a small transaction fee.

    Invoice financing is a great option if you’re currently stripped of cash and you need immediate capital for emergency situations. It frees up cash tied to your outstanding invoices, giving you more available cash.

    4. Find a Different Lender

    If you are running out of options and you can’t seem to urge your lender to help you make the best decisions, it’s probably time to explore greener pastures. If you’ve been denied an SBA disaster loan and you want to re-apply in six months’ time, SMB Compass would be glad to help you out.

    SMB Compass offer a myriad of financing solutions that suit your needs and growth opportunities. We cater to all industries such as restaurants, toy businesses, manufacturing, IT and tech, automotive and hotel businesses.

    We spend time getting to know our clients so we can determine the best financing solution for their business. We provide all the information they need to know, as well as the requirements they need to prepare beforehand. We have dedicated lending specialists so clients are assured of our top notch customer service.

    Ready to apply for an SBA Disaster Loan?

    Can You Get an SBA Loan with Bad Credit?

    Some lenders won’t consider borrowers with bad credit scores so you’ll need to find one who is willing to check your other credentials. Things like your total years in business, your cash flow statement, or any other proof as to why you can be trusted.

    Can you get a sba loan with bad credit? Keep in mind that bad credit usually translates to higher interest rates, stricter lan terms, and greater demands for collateral and personal guarantees. If you don’t need funding immediately, consider waiting until you’re able to increase your credit score so you can qualify for a loan with more favorable terms. If time is of the essence, you’ll have to find other areas of your business that can prove your trustworthiness to the lender. It is possible, you’ll just have to get more creative.

    Ready to apply for an SBA Disaster Loan?

    We Are with You in Every Step of the Way

    This is truly a challenging time for small businesses, just like yours. We’ll make sure to get you all the help you need particularly during this time when there seems to be no end in sight.

    Ready to apply for an SBA Disaster Loan?