What to Do if Your SBA Loan is Denied

Due to their favorable terms and rates, the Small Business Administration (SBA) loans are a sought-after financing solution for U.S. small businesses. However, securing an SBA loan can be challenging due to stringent qualification criteria, lender requirements, and intense competition. Not all businesses succeed in acquiring the full requested amount, and some face outright denial.

Understanding the reasons behind SBA loan rejections and knowing the necessary steps to take post loan denial are important for your business to get the required funding. In this article, we will guide you through understanding SBA loans rejections, rectifying application issues, and exploring other funding avenues to keep your business moving forward.

SBA lenders evaluate loan applications based on the 5Cs: Character, Capacity, Capital, Conditions, and Collateral. Shortcomings in any of these areas can lead to loan denial.

Here are some common reasons why SBA loans are denied:

Poor business credit score

The business credit score is a numerical expression of your business’s creditworthiness, which establishes your business’s character. Your previous debt payments, credit utilization ratio, and available credit are some factors that determine your business credit score. Lenders use it to gauge the risk associated with lending to your business.

Business Credit Scores are calculated by credit bureaus like Equifax, Dun & Bradstreet, and Experian. Generally, an Equifax Credit Risk score above 600 is considered good and increases your chances of qualifying for an SBA loan. Similarly D&B Paydex score of 80 or more is a considered ideal by SBA lenders. A low score can poorly reflect your business’s financial responsibility, leading to loan denial.

Poor personal credit history

Your credit history indicates how you manage credit in your personal life, which lenders extrapolate as a reflection of your business’s financial behavior. For SBA loans, a good personal credit score typically starts around 680. A poor personal credit history can suggest a higher risk of default, making lenders hesitant to approve your loan application.

Business size doesn’t meet SBA standards

The SBA has specific size standards for small businesses that vary by industry, generally based on the number of employees or annual revenues. These standards are outlined in Title 13, Part 121 of the Code of Federal Regulations. For example, manufacturing companies might be limited by the number of employees, typically 500-1500, depending on the subsector, while service-based industries might be assessed based on revenue, often between $7.5 million and $38.5 million.

Businesses exceeding these limits are considered too large for SBA assistance and may have their loan applications denied. Understanding and aligning with these standards is important to be eligible for SBA loans.

Insufficient financial documentation

Lenders typically require a comprehensive set of financial documents during the loan application process, including personal and business bank statements, tax returns, income statements, balance sheets, and cash flow statements. Providing thorough and accurate financial documentation allows lenders to assess your business’s financial health and profitability. Incomplete or inaccurate documentation can lead to misunderstandings or a perception of unreliability, significantly impacting your loan application’s success.

Lack of personal investments

Personal investments in your business, such as capital infusion or asset contributions, demonstrate your commitment and belief in your business’s success. Lenders view this as a positive sign of the owner’s confidence and commitment to the venture. A lack of personal investment can be a red flag, suggesting a lower stake in the business’s success, potentially making your loan application less attractive to lenders.

Lack of collateral

Collateral serves as a security for lenders, minimizing their risk in case of loan default. It can include assets like real estate, equipment, or inventory. Lack of adequate collateral can lead to loan rejection, leaving lenders with no assurance of recouping their investment in the event of default. Demonstrating the availability of valuable collateral can significantly improve the chances of loan approval.

Not exhausted all other options of financing

SBA loans are often seen as a last resort after all other reasonable financing options have been exhausted. These options might include conventional business loans, personal savings, or borrowing from family and friends. If a business has not explored or exhausted these avenues, it may signal to the SBA that it isn’t fully committed to securing financing or may not be in need of an SBA loan, leading to potential rejection.

Age of business doesn’t meet the lending criteria

The longevity of a business often indicates its stability, growth, and potential for success. Many SBA lenders are reluctant to extend loans to startups or companies under two years old due to the higher risks associated with new businesses. Demonstrating a track record of operation and growth is important to meet the lending criteria and securing an SBA loan.

If your SBA loan application is denied, it can feel like a major setback. However, it’s not the end of the road. You can take several proactive steps to understand the reasons behind the rejection, address any issues, and improve your chances for future funding. Here’s how you can turn a denial into an opportunity for financial strategy refinement.

1. Know Why Your Loan Was Denied

The first step after a loan denial is to contact the lender for detailed feedback on your application. Understanding the specific reasons for the denial will guide you in making necessary improvements. Common reasons for SBA loan rejections include insufficient credit scores, inadequate business revenue, lack of collateral, or not meeting the SBA’s business size standards. By knowing the exact cause, you can take targeted actions to address these issues, whether it’s improving your credit score, enhancing business revenue, or seeking alternative funding sources.

2. Improve Your Personal & Business Credit Score

Improving your personal and business credit scores can help enhance your loan eligibility. Start by regularly checking your credit reports for errors and rectifying any discrepancies. Consistently make timely payments on all debts and bills, as payment history significantly impacts credit scores. Work towards lowering your credit utilization rate by paying down existing debts and managing new credit judiciously. Avoid unnecessary credit inquiries, as these can temporarily lower your score. For your business, ensure you have credit accounts set up under its name and manage them responsibly. By taking these steps, you’ll gradually improve your business credit score, making you a more attractive candidate for future loans.

3. Increase Your Revenue & Prove Your Business is Profitable

To increase your business’s revenue and demonstrate profitability, thoroughly analyze your current revenue streams and expenses. Identify areas where you can cut operational and production costs without compromising quality. Streamline business processes for efficiency and consider adjusting pricing strategies to maximize sales and profit margins.

Explore new revenue opportunities, whether that’s expanding your product line or entering new markets. Keep proper financial records and regularly update your financial statements, including profit and loss statements, to reflect your business’s financial health. Presenting a clear picture of profitability and growth trajectory will be key in convincing lenders of your business’s viability and creditworthiness.

4. Create a Solid Business Plan

A well-crafted business plan not only guides your business’s growth but also instills confidence among lenders about your ability to repay the loan. Start by setting SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals to define your business objectives clearly. Use financial forecasting to demonstrate the potential growth and profitability of your business. Conduct thorough market research and competitor analysis to identify your niche and competitive advantage. Highlight your business growth strategies with clear steps and timelines. A detailed and realistic business plan shows lenders that you have a clear roadmap and are committed to your business’s success.

5. Offer Collateral and Personal Guarantee

Offering collateral can significantly enhance your loan application. Common assets used as collateral include real estate, cash savings, equipment, accounts receivable, and inventory. These assets serve as security for the lender, ensuring they have a form of repayment if the loan defaults. Additionally, providing a personal guarantee may be necessary, especially for smaller or newer businesses. This guarantee is a personal pledge to repay the loan, reinforcing your commitment to the business’s success and repayment. Be clear about what assets you’re willing to use as collateral and understand the implications of offering a personal guarantee to secure the necessary funding for your business.

6. Reapply with a Stronger Application

After a loan rejection, waiting at least 90 days before reapplying is typically required. Use this period strategically to strengthen your application. Increase down payments or personal investments in your business to demonstrate commitment. Work diligently to clear any existing debts and improve both your personal and business credit scores. Review and refine your business plan to address any weaknesses previously identified by lenders. Each step will contribute to a more robust application, increasing your chances of success in the next round.

7. Explore Alternative Sources of Funding

If waiting to reapply for an SBA loan isn’t an option, or if substantial improvements to your application aren’t feasible, consider alternative funding sources. These include traditional bank loans, online lenders, credit unions, crowdfunding, angel investors, and venture capital. Each option has its own set of advantages and requirements, so it’s important to do your due diligence and choose the one that best aligns with your business’s needs and financial situation.

Online lenders

The digital landscape offers many online lenders and loan aggregators collaborating with alternative lending institutions to provide various small business loans, including short-term loans, working capital loans, and equipment loans. These online platforms typically require businesses to have been operational for at least six months, possess a fair to good credit score, and demonstrate an annual revenue of $250,000 or more. One of the key advantages of online lenders is the speed of funding — often much faster than traditional banks. They also tend to offer more flexible repayment terms, require less paperwork, and have more lenient eligibility criteria, making them an attractive option for businesses seeking quick and accessible financing solutions.

Business lines of credit

A business line of credit is a flexible loan from a bank or financial institution. Like a credit card, businesses are given a credit limit, which they can draw from to cover expenses or investments. The main advantage is its flexibility; you only pay interest on the amount used. However, it can have higher interest rates than traditional loans, and qualification might require a strong credit history and proof of profitability.

Invoice factoring

Invoice factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount. This provides the business with immediate cash flow. The primary advantage is quick access to cash without waiting for customer payments. However, it can be more expensive than traditional loans due to factoring fees, and it involves relinquishing some control over your invoices.

Equity financing

Equity financing involves raising capital through the sale of shares in your business. This can be a great way to raise funds without incurring debt. One of the main advantages is that, unlike loans, there’s no obligation to repay investors. Your investors become shareholders and seek a return through the business’s future success. However, a significant drawback is the potential loss of control as shareholders may have a say in business decisions and dilution of ownership among existing owners.