June 8, 2022 By Megan Grant

Did your SBA loan get denied? You might not even know why. Most often, though, it’s one of a few common reasons. Here are some reasons why your SBA loan didn’t get approved and what you might be able to do about it.

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6 potential reasons why your SBA loan was denied

Since there are a lot of moving parts when it comes to obtaining an SBA loan, there are several reasons why your loan can be denied. Here are some of the most common.

1. You have a low (or new) credit score

Your credit score is indicative to lenders of how likely you are to repay your loan on time. Numerous factors determine your credit score, including:

  • How much unpaid debt you currently have
  • The length of your credit history
  • How consistently you’ve paid your bills on time
  • Any current loans you already have out
  • If you’ve ever experienced a foreclosure or bankruptcy, and when it occurred

There are different credit score models, but generally:

The higher your credit score is, the likelier you are to: (a) get a loan in the first place; and (b) get a lower interest rate. If your credit score is suffering and your SBA loan was denied, that could be a reason as to why. It signals to lenders that they’re taking a bigger chance on you, and lenders are generally risk-averse.

2. Your credit history has a warning sign

One example is bankruptcy. While bankruptcy is there to help individuals and businesses through financial hardship, it can leave devastating and long-term damage. For one, your credit health may take a hit, with your score dropping by anywhere from about 130 to 200 points. And you know by now that having a solid credit score is important in getting your SBA loan approved.

It’s a similar story for foreclosures. A foreclosure happens when a borrower can no longer keep up with their mortgage payments, so, the lender takes possession of it.

Both bankruptcy and foreclosure suggest to lenders that you might not be the safest borrower. These events can stay on your credit report for up to 10 years, and that may be why your SBA loan was denied. This is another good reason to always prioritize maintaining good credit health.

3. There’s a concern of character, like a criminal record

Your credit report won’t include a criminal record. However, many lenders will perform a background check. While your credit history and score are likely the biggest factors they’ll look at, a criminal record can certainly be a blemish on your SBA loan application.

Will your SBA loan get denied outright? Not necessarily. Some lenders will inquire further about the specific offense. However, it’s up to them to decide what they ultimately want to do.

4. You don’t have enough collateral for a loan

Another way a lender will determine if you’re capable of paying off a loan is to look at the collateral you’re able to offer. Collateral can be property, cash, or another asset that the borrower owns. Should the borrower fail to keep up with payments, the lender has the assurance that they can seize the collateral and sell it to pay off the balance.

If you don’t have enough collateral, this could serve as a reason why your SBA loan may get denied.

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5. Your business doesn’t have enough revenue

While it might seem counterintuitive, it’s true: Lenders’ favorite borrowers are the ones who don’t really need the money. Why? Because they’re the likeliest to pay it back.

If your business is struggling and revenue is down, a lender may feel uneasy loaning you more money. Having other collateral can help, but ideally, you want to be able to demonstrate that your business is thriving and, even better, will continue to skyrocket with the help of an SBA loan.

6. Your capacity to repay your debt is limited

Other things can affect how likely a business is to be able to repay a loan. Something else that can get your SBA loan denied is if you already have another loan out. Lenders might consider this a red flag since an additional loan will likely only put you further in debt.

What percentage of SBA loans are denied?

At the end of the day, how hard is it to get a small business loan? The NSBA Small Business Access to Capital Study found that about 20% of SBA loans are denied, specifically due to business credit. Other estimates say that at larger banks, about 75% of business loans are denied. And at smaller banks, about 51% are denied.

How to reapply for an SBA loan

So, what can you do if your SBA loan gets denied and you’re still looking for financial support? Re-applying is always an option. However, the SBA requires you to wait at least 90 days before re-submitting your application. While the delay may understandably put your business under a greater financial strain, you can use this time to improve your odds by addressing some of the things we’ve discussed above!

Also, bear in mind that there are alternatives to an SBA loan, such as:

  • Lines of credit
  • Merchant cash advances
  • Grants
  • Microloans
  • Crowdfunding

The bottom line

Many variables can play a role in your SBA loan getting denied, including:

  • A low or young credit score
  • A red flag like bankruptcy or foreclosure
  • An issue of character, like a criminal offense
  • A lack of collateral
  • Low business revenue
  • A low capacity to repay the debt

The good news, however, is that there’s always room for improvement, which may increase your likelihood of getting approved. And if you need additional guidance getting an SBA loan, that’s where SmartBiz® comes in. Apply now* and learn more about how we might be able to help you.

*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.

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