SBA loans are among the best small business loans. Eligible small business owners will receive loans with competitive interest rates and favorable repayment terms. But what happens if you are rejected? Here we’ll share common reasons for SBA loan rejection and what you can do about it.
First, some background information. The US Small Business Administration (SBA) generally does not provide loans. Instead, it guarantees loans made by lenders approved by the SBA. The exception is SBA disaster loans (including economic disaster catastrophe loans) that the SBA provides directly to small business owners.
What are the minimum qualifications for an SBA loan?
There are over a dozen different types of SBA loans, each with their own qualification requirements. In general, though, SBA loan requirements include:
To be eligible, companies generally must:
- Be a small business by SBA size standards
- Do not run a business in an unqualified industry
- Working as a for-profit business
- Doing business in the United States or United States territories (or proposing to do business in the United States)
- Have reasonable ownership of the owner
- Not eligible for similar loans anywhere else
- Get acceptable credit
There are some exceptions to these qualifications. Disaster loans may be available to some nonprofits, for example, and eligibility criteria for COVID-19 EIDL loans have been expanded due to the pandemic to include organizations that would normally not qualify.
Learn more about SBA loan requirements here.
Possible reasons for your SBA loan application to be denied
Given this background, let’s look at some common reasons for an SBA loan rejection:
Entrepreneurs with bad credit will find it difficult to obtain an SBA loan. You must have good credit to get an SBA loan; However, what is described as good credit will vary depending on the lending program and the lender.
Lenders generally are required to check the personal credit history of all owners who have ownership of 20% or more. SBA guidelines typically require “acceptable credit,” but for the most part, you don’t have a minimum personal credit score required for approval.
However, there are some loans that require a minimum FICO SBSS score as part of the pre-application screen. This business credit score can combine information from personal and business credit reports, along with financial statements, into a single score.
Current FICO SBSS minimum scores:
- 7 (a) micro-loans: 155
- Community feature: 140
- Express Bridge Loan Pilot Program: 130
If the borrower’s FICO SBSS score does not meet the minimum, a manual credit review will be required. The application could still be approved to a lower degree, depending on the outcome of that review.
Negative items in the credit score such as liens, judgments, or bankruptcy filings must be made clear on the loan application when the lender submits it to the SBA.
A business that does not have the ability to repay an SBA loan (now or in the near future) will be rejected. When lenders analyze whether the company will be able to make the payments, cash flow will be a major part of the analysis. As the SBA’s Standard Operating Procedures explain:
The applicant’s cash flow is the primary source of reimbursement, not any expected recovery from the liquidation of the collateral. Thus, if the lender’s financial analysis shows that the applicant lacks reasonable assurance of timely repayment of the company’s cash flow, the loan application should be rejected, regardless of available collateral or external sources of repayment.”
For an existing business, the financial analysis will be based on “the last three years of historical financial information (tax returns or balance sheet with debt schedule and income statement) as well as an interim financial statement.”
What about startup companies? The guidelines state that for new businesses, cash flow can be based on “detailed projections, including supporting assumptions that reflect positive cash flow within two years.”
You do not 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 do not have collateral. However, the SBA will require available collateral to be pledged to secure the loan. This may mean a requirement to pledge home ownership if available, and if business assets are insufficient to secure the loan. (For loans of $25,000 or less, the lender is not required to take out collateral.)
It should also be noted: Those who own 20% or more of the business must provide a personal guarantee.
A business owner who starts or purchases a business but has not put his own money into the business may be rejected. This contribution from the owner is referred to as “equity injection”. Generally, a credit standby agreement requires a minimum equity of at least 10 percent of the total costs of a new project (less than one year) or 10 percent in the event of a change in ownership. There are some exceptions, so talk to the lender if this is a concern.
Small business owners who qualify for traditional small business loans with similar terms are not eligible for SBA financing. Don’t worry too much about this requirement because the lender is responsible for documenting why the borrower could not obtain similar financing elsewhere. However, if the SBA does not consider the lender’s interpretation appropriate, it may result in rejection.
Borrowers who do not meet the criteria for SBA personality (mainly related to criminal records) may be rejected. A criminal record does not exclude all applicants, but those currently incarcerated, on probation or probation, or those currently under indictment, criminal information, or other criminal charges will not be eligible.
Borrowers must complete a Borrower Information Form that includes questions about their criminal history. If the borrower answers “yes” to question 17 about current imprisonment or criminal charges, the loan application will be rejected. If they answer “yes” to questions 18 or 19, the lender must take additional steps to determine eligibility.
Note: The Small Business Administration requires applicants to answer “yes” even when records are sealed or crossed out, and pledges to keep this information private and confidential. It notes: “There are no exceptions or waivers to this policy.”
Previous loss for the 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 the borrower does not repay the loan and the SBA cannot collect it, the risk can ultimately fall on the taxpayer. This is a fairly detailed topic with specific topics, so if you defaulted on a previous SBA loan, federal student loan, or federal tax debt, be sure to discuss this with the lender. Some federal debt may be acceptable, especially if the borrower is on a formal repayment plan.
What can I do after an SBA loan is rejected?
First, try to understand why your application was rejected. The lender should provide a letter explaining why you were refused, but this may not always be obvious. 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 if the reasons for your refusal are based on the requirements of the lender, or the requirements of the SBA. this is the difference:
The SBA sets minimum standards for each program that a lender must follow so that the lender can collect using an SBA guarantee if the borrower fails to repay the loan. But then the lender may set its own policies, as long as it does not discriminate against the borrowers on prohibited grounds. Examples of lender criteria that may vary for different lenders include minimum credit score, time in business, or an industry.
Can I apply for an SBA loan if it is refused?
You may be able to reapply for an SBA loan, depending on the reason for your refusal, the type of loan and the status of the lender.
If you were rejected because you do not meet the requirements of the SBA (small business size criteria, for example, or industry), you may be able to request reconsideration. For example, if you have been denied due to a past criminal history and want to appeal, you can request that the negative personality identification be reconsidered within 6 months of the date of the 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 has been submitted to the SBA’s Loan Guarantee Processing Center (LGPC), an application… rejected by the LGPC may not be approved by any lender under the authority of the PLP. ETran and SBA One will not allow such an application to be made under the authority of the lender’s PLP for a period of 12 months from the date the application was withdrawn, disqualified, or rejected. ”
PLP stands for Preferred Lender Program which signals accredited lenders to make a number of decisions about SBA loans to simplify the process. Etran and SBA One are technology systems used by the Small Business Administration.
If the lender believes that the reason(s) for the refusal has been overcome, it may submit an application for reconsideration of the loan, along with a detailed written explanation of how the applicant overcame the refusal reason(s). Lenders must do so within six months of the date of the rejection. If they do so later, they must include updated and detailed financial statements.
All of this means that if your application for an SBA loan is denied, you will first need to seek guidance from your lender. Try to address the reasons for your refusal and ask if your application can be reconsidered. If your experience with this lender makes you think it is not a good fit for you, talk to another lender but be sure to tell them that you have been rejected previously and why. They may recommend that you take additional steps or wait before applying again.
If your application for a COVID-19 Economic Disaster (EIDL) loan is denied, you have up to six months to reapply. This program offers working capital loans of up to $2 million with a repayment period of up to 30 years at 3.75% for small businesses.
The deadline to apply for the COVID-19 EIDL loans closed on December 31, 2021 but the Small Business Agency is still accepting applications for reconsideration, applications for disapproved loans as well as requests for loan amount increases up to the $2 million limit.
You have six months from the date your application was denied to file for reconsideration, and another 30 days if your application for reconsideration was denied. You have up to two years after your original loan application to apply for a funding increase unless funds for this program are exhausted.
Alternative options if you are denied an SBA loan
If you are denied an SBA loan, you may want to consider other types of small business financing. Online lenders in particular are likely to offer a simplified application process and more flexible qualification requirements, although the 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:
If you’re having trouble qualifying because of low credit scores, look into:
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