Why Was My SBA Loan Declined?
Small businesses can significantly benefit from loans provided by the Small Business Administration. However, qualifying for SBA loans can be a long process, and not every business may get approved. Being a small business isn’t enough to get the funding you need from the SBA. Learn more about why an SBA loan got declined and what the options are moving forward.
Common Reasons for SBA Loan Denial
The first thing to remember is that SBA loans aren’t the only kind of financing available for small businesses and not to panic. You should also not forget that SBA loan requirements are precise, and not every company is ready for the SBA loan process. SBA loans have been declined for a wide variety of reasons and technicalities, including but not limited to:
- Not in an SBA approved industry
- Insufficient need for funds
- Incomplete paperwork
- Do not have enough cash flow or free capital
- Low credit score or risky credit history
- Too much debt-to-income ratio
- Not classified as a small business
- Do not have sufficient collateral or assets
What Percentage of SBA Loans Are Denied?
The Department of Labor reports that over 20% of small businesses fail within their first year of operation, and then around 50% fail before the five-year mark. It is for these reasons that small businesses are an increased risk for lenders.
Because small businesses come with such a significant risk, many loan applications are not approved. Based on approval rates from lenders, the combined approval rates equal around 50% at any given time. With SBA loans as a microcosm of this number, applicants can assume that one out of every two businesses has their SBA loan declined.
Can I Find Out Why My SBA Loan Was Denied?
Aside from the lengthy application process, one of the most frustrating parts of securing financing is waiting for approval or denial. Worse yet, denial often comes in the form of a letter in the mail. Rather than including the specific reasons you were not approved, the letter simply states your refusal and thanks you for your time.
To learn more about why your loan application was denied, you will have to reach out to the lender. Many applicants feel defeated at this stage of the process and are hesitant to reach out to the denying lender. Remember, you can only improve your odds for next time if you know why you were denied.
Can I Reapply for an SBA Loan?
Requesting specific details about why your SBA loan declined is the first step in reapplying, and the second step is waiting at least 90 days before you apply again. In that 90 days, you may have enough time to complete necessary actions that can boost your application if you wish to reapply. In 90 days, you may also decide that reapplying may not be in the best interest of your business and may seek out other financing options. Remember, every time a hard inquiry is made against your credit, it drops one to three points.
Improve Your Personal or Business Credit History and Score
A low credit score and risky credit history are common reasons for loan denial. Lenders may not be able to clearly identify your ability to repay with the credit score you have. Your credit history may not be damaged; it may simply not be long enough. To improve your credit, you can take several steps that will help you and your business in the long run:
- Wait two or more years between credit applications
- Steer clear of liens, bankruptcies, or legal issues
- Don’t max out credit cards or credit lines
- Complete payments on time and in full
- Keep open credit lines to a regular minimum
- Increase assets for collateral purposes
Boost Your Business Cash Flow and Ability To Repay an SBA Loan
The ability to repay is likely the most considerable risk that lenders use as a basis for your SBA loan decline. To decrease this risk, you must be able to show lenders that you have plenty of working cash flow and decreasing debt as part of your regular business operation. Increasing your revenues through practical business measures is one way to prove this influx of money. Another way to illustrate your ability, if you are an emerging start-up, is to create a business plan outlining your approach to increasing profit margins over time.
Increase Your Personal or Business Assets So You Can Provide Collateral
Assets help secure your SBA loan and reduce the risk incurred by lenders. Because you have assets to use as collateral, lenders know that if your ability to repay is in question, they will be able to recoup at least some of their money. You can increase your assets by paying off your home, car, business equipment, inventory, etc. Lenders are interested in anything you have that can be sold for their potential profit loss.
Have a More Mature Business
Sometimes, 90 days will not be enough to do the work necessary to reapply for an SBA loan. If your business is relatively new or if you are a start-up, your business may simply be too risky to be approved for some time. Two to three years is the recommended time frame for established companies if your credit is shaky or if your collateral is not substantial enough to apply for an SBA loan at this time.
What Are My Options When My SBA Loan Is Denied
If your business was declined for an SBA loan, you’re certainly not alone. Many businesses simply aren’t in the right stage of operations to qualify for many different reasons. If you do not want to continue pursuing an SBA loan, other financing options are available.
Contact DCV Franchise Group today to learn more about financing solutions for your small business.