July 25, 2023 By Max Freedman

SBA (Small Business Administration) loans are often regarded as a great deal. With lower interest rates, longer repayment terms, and low monthly payments, SBA loans are generally considered the best option for small business owners looking to grow.

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Aside from the great rates and terms, SBA loans are often popular because the loan may be used in a variety of business-building ways. Proceeds from an SBA loan may be used for working capital, to finance equipment purchases, to hire employees, and more. SBA loans may even lead to considerable savings when used to refinance existing high interest debt.

Since SBA loans are the gold standard and backed by the government, not everyone qualifies. Learn why you may be struggling to obtain an SBA loan and tips on how you may be able to get approved.

What are some common reasons SBA loans are denied?

Below are some common reasons why you can’t get an SBA loan.

1. You have a low credit score

Because an SBA loan is guaranteed by the government, they don’t necessarily want to take chances on borrowers with poor personal credit scores. Having a credit score of at least 680 and a mostly unblemished credit history may help you qualify and get lower interest rates. Consider some best practices for increasing your score to improve your chances of qualifying. 

2. You defaulted on a student loan

The Small Business Administration requires that borrowers are current on all government loans to qualify for an SBA loan. Past defaulted government loans may disqualify borrowers as the SBA reviews defaults on federally backed student loans.

3. You’re a newbie

The SBA generally won’t grant loans to brand new businesses. Traditional lenders in the SmartBiz® network require two years of time in business. Why? Because those 24 months help to show that you have steady revenues and give lenders an idea of how much money your small business takes in each year. This longer-term view of your business finances may help the SBA assess the likelihood that you’ll pay back your loan.

4. You’re reluctant to personally guarantee a loan

Once you obtain an SBA loan, you are personally responsible for paying the loan back, even if the business shuts down or has other financial issues. If you don’t pay back the loan, a personal guarantee allows the lender to sell off your personal assets (e.g., a home or car) to satisfy the loan. If you don’t want to personally guarantee an SBA loan, then you generally won’t qualify. Some alternative lenders do not require personal guarantees, but you’ll likely be unable to get the size of loan you’d like, and the cost will generally be higher.

5. You don’t have sufficient collateral or assets to secure your loan

Any business asset that has value and can be sold by the lender to pay off the loan, may be considered collateral. Some examples of collateral include:

  • Equipment
  • Vehicles
  • Buildings
  • Inventory
  • Accounts receivables

Before you start the process, you should review the typical collateral requirements for SBA loans so you know what to expect.

6. You don’t have enough cash flow to meet loan repayment requirements

Your business may be headed for trouble if you don’t have a handle on your cash flow. Poor cash flow management and understanding of cash flow may contribute to business failure. SBA lenders typically want to see strong cash flow indicating that the borrower may fulfill the repayment requirements. To better avoid loan rejections, consider learning more effective cash flow management skills to help control your profits and expenses.

7. You have too much outstanding debt

Business debt is any debt you take on for your business. If you have outstanding debts, your cash flow is typically impacted. Lenders want to know that you have the funds to handle an additional debt payment. If you’re concerned about your business debt load, you may want to consider taking the time to learn about debt management relief before you pursue a loan. 

8. You operate in an industry that the SBA does not lend to

Excluded business types that are not able to qualify for an SBA loan include life insurance companies, lobbying organizations, certain types of franchises, cannabis-based businesses, certain types of health businesses, and more. Make sure to do proper research on businesses ineligible for SBA loans before applying.

9. You’re not considered a “small business” according to the SBA 

The SBA definition of a small business varies by industry. In many, but not all, cases, your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years. Your net income must be under $5 million, and your tangible net worth must be less than $15 million.

10. You abandon the application or forget some important documentation

Lenders require documentation because they want to be assured they are lending to a responsible business owner who is able to repay the loan in full. Organize your paperwork and double check that you have all the required financial statements and other documentation to help eliminate issues down the line.

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What percentage of SBA loan applications are typically denied?

Although the SBA does not release specific figures for SBA loans that get denied, most business loans overall are not approved. In May 2022, big banks approved 15.3 percent of small business loans Small bank and credit union approval rates hovered just above 20 percent Institutional lenders approved 25.5 percent of loans, and alternative lenders approved 26.9 percent of loans.

What should you do if your SBA application is declined?

If you’ve been turned down, it’s not the end of the world.  Most fFinancial institutions may outline the reason why your loan is rejected. This generally gives you the opportunity to figure out where your application was lacking and try again. Consider the following tips to help you get the capital you need. Showing responsible payback may help you qualify for an SBA loan in the future.

Determine the reason for being rejected

Review the common rejection reasons above. If you’re unable to determine the reason, consider asking your lender for a detailed explanation so you may improve in those areas.

Understand your business credit score

Not sure about business credit scores? Take our 5-question quiz to determine your knowledge gaps: Test Your Business Credit Score IQ.

If your numbers are not where they need to be, there are steps you may be able to take to raise your score. Some of these include decreasing your credit utilization ratio, establishing supplier accounts, and disputing any errors and inquiries on your credit report. 

Consider alternative funding options

There are generally lots of financing options for business owners who can’t qualify for an SBA loan. These include:

  • Bank term loans - With a bank term loan, you borrow a set amount of money upfront and pay back with interest, on a specific repayment schedule. Bank term loans are available through banks in the SmartBiz® network for working capital, debt refinance and new equipment purchases. Small business credit cards – This funding option gives business owners access to a revolving line of credit. Small business credit cards have a set credit limit and allow you to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You may get approved for a credit card through a bank or apply online. 
  • Business lines of credit - Business line of credit funding amounts are typically lower than bank term loan amounts, and their maximum amounts are proportional to your credit score. Another distinction between business lines of credit and bank term loans: You are generally required to use all your funds with bank term loans, which isn’t true with business lines of credit. Additionally, only bank term loans call for interest payments on your entire loan – you’ll only pay interest on the portion of your business credit line that you use. 
  • Merchant cash advances - If you accept debit or credit card payments, you should be able to apply for merchant cash advances (MCAs). These loans generally allow you to repay your loan by setting aside a small portion of every single card transaction and incrementally sending these sums to your card provider. Traditional installment-based payment plans are also available upon request. Although business owners may appreciate the convenience of MCAs, this ease may conceal MCAs’ exceedingly high APRs. 

When are you able to apply for an SBA loan again?

If a lender rejects your application, you’ll typically need to wait 90 days before reapplying. This waiting period may give the lender room to free up space in their schedule so they can review other applications. You may want to use this period to improve your business finances and take other steps to increase your loan eligibility. 

In conclusion

Are you in need of funding? Don’t waste time going from bank to bank filling out multiple applications. SmartBiz® helps you find the best financing for your unique needs whether that’s an SBA loan, Bank Term loan, or other financing. About 90% of qualified applications we refer to banks are funded, and our financial professionals are on hand to answer your questions. Discover if you’re pre-qualified here without impacting your credit score.*

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