The U.S. Small Business Administration (SBA) helps entrepreneurs start and grow their businesses through a wide range of loan and financing programs. While the SBA is not technically the lender, they are a government agency that provides guarantees of up to 85% of the lender amount.
SBA loans are an attractive option for many up and coming business owners as they offer incredibly low-interest rates, lengthy repayment terms, and simple monthly payments. They are designed to give businesses good footing to gain access to the financial products they need to hit the ground running.
However, with such attractive rates, terms, and payment schedules — it shouldn't come as a surprise that SBA loans are not easy to obtain. Your credit score, time in business, cost of goods, and previous years' revenue will all be heavily scrutinized — so be certain that you're in a good place before going down this path, or you're certainly going to be denied. Businesses that don't have the optimal qualification factors in place can certainly seek alternative financing solutions — but for now, we'll be diving into what happens if you were denied an SBA loan.
A denial letter can be a devastating blow, but it's not the end of the world. With the right information, plan, and motivation, you can get back up on the horse and obtain the financing you need to reach your goals.
1. Figure Out Why You Were Denied
Alright, so you've been denied for an SBA loan: what should you do? The very first step you'll need to take is figuring out why you were denied. This is crucial information that could help you reapply once you've corrected the issue or hit a certain goal that you may have been missing, whether it be a credit score or revenue objective.
The good news is that you're legally obligated to a written letter explaining why you were denied. Depending on what type of SBA loan you were trying to obtain, this letter will either come from the SBA directly or from the lender. However, it's not uncommon for these letters to be unclear regarding the exact reason for denial, which is why many business owners seek loan specialists to clear up misunderstandings and prepare them for approval.
All SBA lenders have their own eligibility requirements and guidelines — but most lenders follow a general pattern. When it comes to getting denied for your SBA loan, it's more than likely for one of these five reasons.
- Your credit score is too low or lacking credit history (also bankruptcy or other red flags may cause denial)
- Character issues (criminal record)
- Lacking collateral (if the loan is secured)
- You don't have enough business revenues or capital to make the repayment
- Existing loans are limiting your capacity to repay the financing
Regardless of the reason behind the denied loan, it's important to get the why from the lender or SBA. An honest and non-emotional conversation can go a long away in gaining an understanding of being turned down so that you can plan for the future.
2. Build Upon What You Learned & Reapply
Loans are fairly predictable if you've gone through the proper preparation steps and know what numbers you need to hit before applying. Whether it's your credit score, collateral, or revenue — there are certain goals to hit before you should undergo the time-consuming process of applying.
Because SBA loan programs have pretty straightforward and difficult loan requirements, they may be intimidating for some business owners. However, the more clear-cut your loan eligibility qualifications are, the better prepared you can be.
Depending on your current situation and plan for the future, reapplying may not be the best move. You have to wait a minimum of 90 days after being denied to even attempt to reapply, so if you're looking for a fast loan, you may have to look elsewhere.
Your specific industry may also play a role in the reapplication process, as certain markets have a more difficult time finding the financing they need. So, if you were denied due to your industry, an SBA loan may not be the right fit. However, if you were denied for a different reason, here's what you can do to boost your application and strengthen your chances of approval.
- Improve your personal and business credit scores. When it comes to getting an SBA loan, both personal and business credit is typically evaluated, so make sure these are strong. If your personal credit is above 620, you're in good shape — but many lenders will want to see scores of 700+. For business credit, you'll want to be at the very least in the 140 range.
- Work on business financials to improve your chances of approval. Both lenders and the SBA want to ensure that their loan will be paid back on time and in full, so they'll take a deep dive into your profit, revenue, and existing debt to make sure you're a reliable borrower. They may use a debt service coverage ratio (DSCR) to determine the likelihood that you'll be able to pay back the loan.
- Take the time you need to get your business fully up and running. Sometimes, SBA applications get denied because a business hasn't been up and running long enough to prove they're able to pay back the loan. Give yourself sufficient enough time to increase revenue, implement your business plan, and build enough credit to get approved.
3. Check Out Alternative Routes to Financing
The SBA is a great resource for obtaining the loan or financing solution you need for your business, but it's certainly not the only one. If you're dealing with SBA loan denial, but you need cash flow fast, you may not have 90 spare days to wait (not to mention the time-consuming nature of applying for an SBA loan).
There are fast and easy ways to get the funding you need. Depending on what type of SBA loan you were attempting to obtain and the reason for why you were denied, there's a wide range of options that could be a sound alternative that works for your business today.
Bad credit business loans can be a great way to get financing with a less than stellar credit score. Bad credit business loans may include:
- Short term business loans reduce the amount of capital you can borrow while also tightening up the time of repayment and frequency of payments.
- A merchant cash advance (MCA) works by taking a fixed percentage of future credit card sales. MCAs are super-easy to apply for and a ton of flexibility — but can have higher costs and fees.
- Similar to an MCA, a business cash advance takes a fixed percentage of purchases, but it's not limited to just credit card sales. Instead, it takes a fixed amount of overall transactions and is a fast way to get cash flow to your business.
- Another alternative is invoice financing, which allows business owners to leverage their unpaid invoices for quick cash. Through invoice financing, the business that still hasn't paid their invoice is the one getting credit checked, which leaves you free from credit score restrictions.
Don't Give Up
If you were denied an SBA loan, don't give up. It may seem like the end of the world or a significant roadblock, but it's a great chance to identify holes in your business and create actionable plans for fixing them. So, if you're denied an SBA loan, make sure you follow these steps.
- Speak with your lender or SBA point of contact to better understand why you were denied. Don't be afraid to ask questions and seek out some tips that can help you reapply with success.
- Figure out how quickly your business needs the cash. If it's urgent, identify some alternative financing routes to get the money you need. If it can wait, take the steps we mentioned to strengthen credit score and financials to reapply for an SBA loan successfully.
- Research research research. Before applying for any loan, make sure that you're doing the proper preparation to know whether or not it's worth your time. If you were denied an SBA loan, that's a great learning experience in figuring out the exact requirements necessary for getting approved.
There you have it! Handling an SBA denial can paint a vivid picture of what type of entrepreneur you want to be. Don't give up, don't give in, get creative, and find out what you can do to succeed in finding the financing solution for your business.