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.
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.
Below are some common reasons why you can’t get an SBA loan.
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.
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.
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.
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.
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:
Before you start the process, you should review the typical collateral requirements for SBA loans so you know what to expect.
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.
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.
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.
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.
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.
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.
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:
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.
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.*