Why Was My SBA Loan Declined? What To Do After A Denial | Nav (2024)

SBA loans are considered one of the best small business loans. Small business owners who qualify will get loans with competitive interest rates and favorable repayment terms. But what happens if you’re turned down? Here we’ll share common reasons for an SBA loan denial and what you can do about it.

First, some background. The U.S. Small Business Administration (SBA) generally doesn’t make loans. Instead, it guarantees loans made by lenders approved by the SBA. The exception is SBA Disaster Loans (including Economic Injury Disaster Loans) which the SBA makes directly to small business owners.

What Makes Up a Perfect SBA Loan Application?

A great SBA loan application demonstrates thorough planning, financial responsibility, and a clear understanding of your business and its market. There’s no exact definition of a perfect application, but the following components are crucial for a strong SBA loan application:

  • Comprehensive business plan: A well-structured business plan that outlines your business idea, market analysis, marketing strategies, financial projections, and management team. It should showcase a clear understanding of your industry and target market.
  • Strong personal and business credit history: Demonstrates your financial responsibility and increases your chances of getting the loan approved. Both personal and business credit scores should be in good standing.
  • Detailed financial statements: Including balance sheets, income statements, and cash flow statements. These documents should accurately reflect the financial health of your business, showcasing its ability to repay the loan.
  • Collateral: Offer enough collateral to secure the loan, which could be business assets or personal assets, depending on the type of SBA loan you’re applying for. Having valuable collateral can increase your chances of approval, as it provides the lender with a form of repayment if the loan defaults.
  • Sufficient equity investment: You invested your own money into the business. SBA loans typically require borrowers to have a certain percentage of equity in the business. This demonstrates your commitment to the success of the venture and shows the lender that you have a stake in the game.
  • Clear purpose for the loan: Clearly define how you plan to use the loan funds. Whether it’s for working capital, purchasing equipment, or expanding your business, having a clear and well-defined purpose for the loan shows that you have a concrete plan for the funds and how they will benefit your business.

Crafting a perfect SBA loan application requires attention to detail, thorough research, and a clear understanding of the requirements and expectations of the lender.

What Are the Eligibility Requirements for an SBA Loan?

There are over ten different types of SBA loans, and each has its own qualification requirements. Generally, though, SBA loan requirements include the following:

To be eligible, businesses must generally:

  • Be a small business as defined by SBA size standards
  • Not operate a business in a ineligible industry
  • Operate as a for-profit business
  • Do business in the U.S. or U.S. territories (or propose to do business in the U.S.)
  • Have reasonable owner equity
  • Not be eligible for similar loans elsewhere
  • Have acceptable credit

There are some exceptions to these qualifications. Disaster loans may be available to certain nonprofits, for example, and the eligibility standards for COVID-19 EIDL loans due to the pandemic were expanded to include organizations typically not eligible.

Learn more about SBA loan requirements here.

What Disqualifies You From an SBA Loan?

Given that background, let’s look at some common reasons why an SBA loan may be declined:

  • Too low of credit scores
  • Inadequate cash flow
  • Too little collateral
  • Lack of owner equity
  • Eligible for credit elsewhere
  • Owner(s) have criminal history
  • Prior default on loans

Let’s explore each of these in detail below.

Possible Reasons for Your SBA Loan Application to Be Declined

Credit scores

Entrepreneurs with bad credit will find it difficult to get an SBA loan. You should have good credit to get an SBA loan; however, what qualifies as good credit will vary depending on the lender and loan program.

Lenders generally must check personal credit history for all owners with 20% or greater ownership. SBA guidelines typically require “acceptable credit”, but for the most part, don’t have a minimum required personal credit score to be approved.

However, there are some loans that require a minimum FICO SBSS score as part of a prescreen of the application. This business credit score can combine information from personal and business credit reports, along with financial data, into a single score.

Current minimum FICO SBSS scores:

  • 7(a) Small Loans: 155
  • Community Advantage: 140
  • Express Bridge Loan Pilot Program: 130

If the borrower’s FICO SBSS score does not meet the minimum, there will be a manual credit review. It is still possible the application may be approved with a lower score, depending on the outcome of that review.

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Negative items on the credit score such as liens, judgments or bankruptcy files must be explained in the loan application when the lender submits it to the SBA.

Cash flow

A business that does not have the ability to repay the SBA loan (now or in the near future) will be declined. When lenders analyze whether the business will be able to make payments, cash flow will be a key part of the analysis. As the SBA standard operating procedures explain:

“The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.”

For existing businesses, financial analysis will be based on “the three most recent years of historical financial information (tax returns or balance sheet with debt schedule and income statement) plus an interim financial statement.”

What about startups? The guidelines state that for new businesses, cash flow can be “based on detailed projections, including the supporting assumptions which reflect positive cash flow within 2 years.”

Collateral

You don’t have to have collateral to get an SBA loan. In fact, these loans are designed in part for borrowers who can repay the loan but don’t have collateral. However, the SBA will require available collateral to be pledged to secure the loan. That could mean a requirement to pledge home equity if it is available, and if business assets aren’t sufficient to secure the loan. (For loans of $25,000 or less, the lender is not required to take collateral.)

Also worth noting: Those who own 20% or more of the business must provide a personal guarantee.

Equity injection

A business owner who is starting or buying a business but has not put her own funds into the business may be declined. This contribution from the owner is referred to as “equity injection.” Generally, the SBA requires a minimum equity injection of at least 10 percent of total costs for a new business (less than one year old) or 10 percent in the case of a change in ownership. There are some exceptions, so talk to your lender if this is a concern.

Credit elsewhere

Small business owners who are eligible for conventional small business loans on similar terms are not eligible for SBA financing. Don’t worry too much about this requirement as the lender is responsible for documenting why the borrower cannot get similar financing elsewhere. However, if the SBA does not consider the lender’s explanation adequate it could result in a rejection.

Criminal history

Borrowers who do not meet the SBA character standards (primarily related to criminal records) may be turned down. A criminal history does not disqualify all applicants, but those who are currently Incarcerated, on probation, or on parole or those who are currently subject to an indictment, criminal information, arraignment, or other criminal charges will not be eligible.

Borrowers must fill out a borrower information form that includes questions about criminal history. If the borrower answers “yes” to question 17 about current incarceration or criminal charges,, the loan application will be declined. If they answer “yes” to questions 18 or 19, the lender must take additional steps to determine eligibility.

Note: The SBA requires applicants to answer “yes” even when records have been sealed or expunged, and promises to keep that information private and confidential. It notes: “There are no exceptions or waivers to this policy.”

Prior loss to government

Borrowers who have defaulted on loans to the federal government may be denied an SBA loan.

SBA loans are guaranteed by the SBA up to a certain percentage (depending on the loan program). If a borrower doesn’t repay the loan and the SBA cannot collect, the risk can ultimately fall on taxpayers. This is a fairly detailed topic with specific topics, so if you have defaulted on a prior SBA loan, federal student loan or federal tax debt, be sure to discuss this with your lender. Certain federal debts may be acceptable, particularly if the borrower is in a formal repayment plan.

What Portion of Businesses Get Denied for SBA Loans?

In comparison to most small business loans, getting an application for an SBA loan denied is surprisingly common. The approval process is notoriously difficult and time-consuming, which can lead small business owners to look for alternative financing options. If a small business owner shows any red flags to lenders, it can be a reason to get a denial letter.

What Can I Do Next After a SBA Loan Denial?

First, try to understand why your application was declined. The lender must provide a letter explaining why you were denied, but that may not always be clear. Ask the lender to explain any reasons you don’t understand. Don’t be afraid to ask questions and insist on helpful answers.

Then try to understand whether the reasons you were declined were based on the lender’s requirements, or an SBA requirement. Here’s the difference:

The SBA sets minimum standards for each program that the lender must follow so that the lender can collect using the SBA guarantee if the borrower fails to pay back the loan. But beyond that, the lender may set its own policies, as long as they don’t discriminate against borrowers on a prohibited basis. Examples of lender standards that may vary by lender include a minimum credit score or time in business, or the industry.

Can I Reapply for an SBA Loan If Denied?

You may be able to reapply for an SBA loan, depending on the reason you were denied, the type of loan and the lender status.

If you were denied because you don’t meet SBA requirements (small business size standards, for example, or industry) you may be able to ask for reconsideration. For example, if you were denied due to a previous criminal history and you want to appeal, you can request a reconsideration of an adverse character determination within 6 months of the date of SBA’s decision.

In some cases you may not be able to reapply for a year, but the lender may be able to request reconsideration. The SBA guidelines state that once your application is submitted to the SBA’s Loan Guaranty Processing Center (LGPC), an application…declined by the LGPC may not be approved by any Lender under its PLP Authority. ETran and SBA One will not permit the submission of such an application under any Lender’s PLP authority for a period of 12 months from the date of the withdrawal, screen-out, or decline of the application.”

PLP refers to the Preferred Lender Program which refers to lenders approved to make a number of decisions about SBA loans to streamline the process. Etran and SBA One are technology systems used by the SBA.

If the lender believes the reason(s) for decline have been overcome, it may submit a request for reconsideration of the loan, along with a detailed written explanation of how the applicant has overcome the reason(s) for decline. Lenders must do this within six months from the date of decline. If they do so later, they must include updated, detailed financial statements.

All of this means that if your application for an SBA loan is rejected, you’ll want to first seek guidance from your lender. Try to address the reasons you were declined and ask whether your application may be reconsidered. If your experience with that lender leads you to believe they are not a good fit, talk to another lender but make sure you let them know you have previously been declined and why. They may recommend you take additional steps or wait before applying again.

If your application for a COVID-19 Economic Injury Disaster Loan (EIDL) was declined, you have up to six months to reapply. This program offers working capital loans of up to $2 million with a repayment term of 30 years at 3.75% for small businesses.

The deadline for applying for COVID-19 EIDL loans closed on December 31, 2021 but the SBA is still accepting reconsideration requests and appeals for declined loans as well as requests for increases in the loan amount up to the $2 million limit.

You have six months from the date your application was declined to apply for reconsideration, and another 30 days if your reconsideration request is declined to appeal. You have up to 2 years after your original loan request to apply for an increase in funding unless funds for this program are exhausted.

Alternative Options If You Are Declined for a SBA loan

If you are declined for an SBA loan, you may want to consider other types of small business financing. Online lenders in particular will likely offer a streamlined application process and more flexible qualification requirements, though costs are likely to be higher than they would be with an SBA loan.

If you are having trouble qualifying because your business is a startup, you may want to consider other financing options including:

  • Crowdfunding
  • Small business credit cards
  • Vendor or supplier financing

If you are having trouble qualifying for because of low credit scores, look into:

  • Merchant cash advances
  • Invoice factoring or financing
  • Crowdfunding
  • Vendor or supplier financing

What Is the Average Interest Rate for an SBA Loan?

At the time of writing, interest rates on SBA loans range from 11.5% to 15%. Interest rates change frequently and depend on the lender, so be sure you understand the rates you’ll pay before agreeing to take on loan repayments.

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This article was originally written on January 18, 2022 and updated on December 6, 2023.

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Why Was My SBA Loan Declined? What To Do After A Denial | Nav (2024)

FAQs

Why Was My SBA Loan Declined? What To Do After A Denial | Nav? ›

Consider applying again

Can I apply again for SBA loan if denied? ›

SBA guidelines state that a borrower has to wait 90 days after receiving a denial notice before they can reapply for an SBA loan. If you need funding more quickly than 90 days, finding a new lender may be the best idea for you.

What if my SBA loan status is declined? ›

Reasons for My SBA Loan Rejection

Your loan application may not be successful for various reasons, but some of the more common ones are as follows: You or your business has a low overall credit score. You lack adequate collateral or assets to secure the loan. You already have outstanding debts.

Can you reapply for a loan after denial? ›

But be sure to carefully consider the interest rates and your ability to make payments before you apply. It's also important to wait at least one month before reapplying after getting denied and to only borrow an amount that you can comfortably repay.

How do I dispute a loan denial? ›

If you were denied because of a minor issue, such as a typo, reach out to the lender immediately to address the problem. If you need to build your credit, lower your debt or increase your income, consider waiting at least one month — but likely a few months — before reapplying.

What disqualifies you from getting an SBA loan? ›

The most common reasons SBA loans are denied are poor credit, too much existing debt, or insufficient collateral. Other reasons include: Prior bankruptcy. Negative taxable income.

How many times can you apply for SBA? ›

How many SBA loans can you get? While the SBA limits the number of Economic Injury Disaster Loans (EIDL) that a small business can get, there's really nothing that prevents a small business from having multiple SBA loans at a time, including SBA 7(a) loans or SBA 504/CDC loans.

How many small business loans are denied? ›

According to the NSBA Small Business Access to Capital Study, about 20% of all loans to small businesses get denied due to credit problems. Credit issues can significantly impact your ability to secure business loans and the terms of those loans.

Will they forgive my SBA loan? ›

Business owners defaulting on their SBA loan can apply for loan forgiveness, but that does not guarantee the SBA will approve the request. It is more commonly referred to as an "offer in compromise". The SBA evaluates your case and discusses the matter with the lender.

Why are SBA loans hard to get? ›

In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding.

Can I get a loan back after declining it? ›

The good news is that if you reject a student loan and then change your mind later in the same academic year, you can reinstate your loan. The same goes if you took less than you actually qualify for — you can increase your loan amount later on.

How long should I wait after being declined for a loan? ›

Here's how to do it right. First, wait at least 3 to 6 months. Most experts recommend waiting at least 3 months before reapplying for a loan after being declined. Experian, one of the UK's largest credit reference agencies, recommends 6 months.

How do you respond to a declined loan? ›

You could also consider contacting the lender directly to double-check their requirements.
  1. High debt-to-income ratio. ...
  2. Insufficient or unstable income. ...
  3. Basic requirements are not met. ...
  4. Review your decline notice. ...
  5. Review your credit report. ...
  6. Build your credit before applying again. ...
  7. Apply for a lower loan amount. ...
  8. Pay down debt.
May 29, 2024

Does a declined loan affect credit score? ›

Getting denied for a loan or credit card will not be recorded on your credit report, and it will not directly impact your credit scores. To improve the chances that you'll be approved for credit, you may want to take a look at your credit before you apply, and take steps to improve it if you need to.

Can I appeal a declined loan? ›

An appeal is a request to review a decline decision following a formal lending application or where you're unhappy with the lending conditions associated with an offer.

Does getting declined affect credit score? ›

A hard inquiry from a card application can cause a small, temporary drop in credit scores. A denial or approval won't hurt your credit scores, because decisions aren't reflected in credit reports. When making lending decisions, card issuers use credit reports and credit scores to determine creditworthiness.

Can I apply for a second SBA loan? ›

And, just like other loans, you are able to apply for an unlimited number of SBA loans as long as you don't exceed the SBA's loan program borrowing limits. But just because you can apply for multiple SBA loans doesn't mean you'll be approved immediately.

What happens if your business fails and you have an SBA loan? ›

At first, the lender who funded the loan will begin the collection process and take possession of any collateral attached to the loan. They will then submit a claim to the SBA, who will pay the lender the portion of the loan they guaranteed. The SBA will then contact you and request payment to cover their expenses.

What are the odds of getting approved for a SBA loan? ›

Many statistics say that large banks approve SBA loans at rates as low as 20-30%, while smaller banks approve SBA loans at around 40% or less.

Why can't I get an SBA loan? ›

Low credit scores are a common reason why it's difficult to get an SBA loan. Banks are risk-averse, and usually, require borrowers to have a FICO score above 650.

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