It’s no secret that SBA (Small Business Administration) loans are 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.
Aside from the great rates and terms, SBA loans are popular because the loan can be used in a variety of business-building ways. Proceeds from an SBA loan can be used for working capital, to finance equipment purchases, to hire employees, and more. SBA loans can even lead to big 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 might get turned down for an SBA loan and tips on how you might be able to get approved.
What percentage of SBA loan applications are denied?
Although the SBA does not release specific figures for SBA loans that get denied, most business loans overall are not approved. A big bank's loan approval rate typically falls between 10 percent and 30 percent of loans. Small bank and credit union approval rates hover between 20 percent and 40 percent. This translates into roughly 50 percent of loan applications facing disqualification.
According to Nav’s Small Business® American Dream Gap Report, 45 percent of small business owners who are denied financing get turned down more than once, and 23 percent don’t know why their application for a small business loan was rejected.
What are some common reasons SBA loans are denied?
Your Credit Score
Because an SBA loan is guaranteed by the government, they don’t necessarily want to take chances on borrowers with poor credit scores. Having a credit score of at least 680 can help you qualify and get lower interest rates. There are many resources available to learn more about the importance of credit scores. Search the SmartBiz® Small Business Blog for “credit scores” to find informative posts about how scores are calculated and some easy ways to raise yours.
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 can disqualify borrowers as the SBA reviews defaults on federally backed student loans.
You’re a Newbie
The SBA won’t grant loans to brand new businesses. Lenders in the SmartBiz network require two years. Why? Because those 24 months help to prove that you have steady revenues and give lenders an idea of how much money your small business takes in each year. This helps the SBA assess the likelihood that you’ll pay back your loan.
You’re reluctant to personally guarantee a loan
Once you obtain a 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 won’t qualify. Some alternative lenders do not require personal guarantees, but you’ll probably be unable to get the size of loan you’d like, and the cost will generally be higher.
Do not 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. Examples of collateral include:
- Accounts receivables
Before you start the process, review this SmartBiz University® article for additional information: Reviewing Collateral Requirements
Not enough cash flow to meet loan repayment requirements
Your business could be headed for trouble if you don’t have a handle on cash flow. Studies show that poor cash flow management or poor understanding of cash flow contributes to business failure. SBA lenders want to see strong cash flow indicating that the borrower can fulfill the repayment requirements. For additional cash flow information, check out our blog post: Cash Flow Management: A Comprehensive Guide
Too much outstanding debt
Business debt is any debt you take on for your business or LLC. If you have outstanding debts, your cash flow is 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, review this post on the SmartBiz® Small Business Blog: Business Debt Relief: How to Handle Small Business Debt
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. Visit the SBA website for a list of ineligible businesses.
You’re not considered a “small business” according to the SBA
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.
Incomplete application or missing documents
Lenders require documentation because they want to be assured they are lending to a responsible business owner who can repay the loan in full. Organize your paperwork and double check that you have all the required documentation to avoid facing any issues down the line.
What should you do if your SBA application is declined?
If you’ve been turned down, 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, ask your lender for a detailed explanation so you can 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 can take to raise your score. Some of these include decreasing your credit utilization ratio, establishing supplier accounts, and disputing any errors and inquiries. Learn more here: How to Improve Your Business Credit Score in 13 Steps
Consider alternative funding options
There are lots of options for business owners who can’t quite 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 purchase. For more information on the advantages of bank term loans, visit the SmartBiz Loans ® website: Bank Term Loans: Fixed interest rates and shorter repayment terms
- 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 can get approved for a credit card through a bank or apply online. Learn more about the advantages here: Six Benefits of Using a Business Credit Card
- Business lines of credit - Business lines of credit 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 required to use all your funds with bank term loans. Additionally, only bank term loans call for interest payments on your entire loan – you’ll only have to worry about paying interest on the portion of your business credit line that you use. To find out more, visit the SmartBiz Loans blog Small Business Lines of Credit Pros and Cons.
- Merchant cash advances - If you accept debit or credit card payments, you should be able to apply for merchant cash advances (MCAs). These loans 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 can conceal MCAs’ exceedingly high APRs. For further details, read the SmartBiz Loans® blog post: What You Need to Know About an MCA.
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 scores.*
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.