The Small Business Administration (SBA) is one of the biggest lenders to businesses in the U.S.—either providing loans directly, or by guaranteeing loans from other banks and financial institutions. The SBA has some rigorous criteria for the types of businesses it will lend money to, and meeting those requirements can be tough. Even after you’ve been through the application process, it’s possible that your SBA loan will be disqualified or denied.
If that happens, you’ll have questions—and we’re here with the answers. We’ll explain some of the common reasons that SBA loans are denied, let you know how to avoid them, and what to do if your business is still disqualified.
Please note that these guidelines only apply to the regular SBA business loan process. The U.S. government’s response to the pandemic changed some of the criteria for applying for SBA loans like EIDL and PPP funding, and you should understand those requirements separately.
What Percentage of SBA Loans Are Denied?
Although we don’t have figures specifically for SBA loans, we do know that the majority of business loans overall are not approved. Big bank approval rates might be anywhere between 10 percent and 30 percent of loans, while small bank and credit union approval rates hover between around 20 percent and 40 percent. What this means is that any particular loan has a greater than 50 percent chance of being disqualified.
What Are Some Common Reasons for My SBA Loan to be Denied?
There are all sorts of reasons why your loan application may not get through, but some of the more common ones are:
- You have a low overall personal or business credit score, or a poor credit history.
- You do not have sufficient collateral or assets to secure your loan.
- You do not have enough free capital or cash flow to meet loan repayments.
- You have too much already outstanding debt.
- You have previously defaulted on a government loan or have a tax lien, judgment, or bankruptcy against you.
- You haven’t demonstrated sufficient financial need for the loan.
- You’re in an industry that the SBA does not lend to.
- You’re not considered a “small business.”
Can I Find Out Specifically Why My SBA Loan Was Denied?
If your loan is denied, you’ll get a denial letter from the SBA or from the lender. This should detail the type of loan you applied for. Unfortunately, these letters do not often include specific reasons for why you did not get through the approval process. You should contact the lender that denied you and request details of your case and why you were denied.
Can I Reapply for an SBA Loan?
In most cases, if your SBA loan is denied, you can reapply. You will have to wait at least 90 days after you are disqualified until you can reapply for an SBA loan. When you do reapply, you will need to strengthen your application to increase your chances of getting approved. Here’s how to do that:
Improve Your Personal or Business Credit History and Score
If your business does not have its own credit score then a lender used your personal credit score to decide whether to provide financing. A low personal credit score can disqualify you from an SBA loan. You can boost your personal credit score by:
- Sensibly managing the amount of debt you have and not using up all of your credit limits.
- Always making repayments on time and avoiding delayed payments.
- Having a longer credit history.
- Not defaulting (failing to pay) loans and staying free of judgments, liens, and bankruptcies.
- Not applying for credit too often.
- Not having too few or too many credit accounts.
If you have a business credit score, you will use a similar process for improving it, specifically focusing on the debt and assets held on behalf of your business.
Boost Your Business Cash Flow and Ability to Repay an SBA Loan
The finances of your business are critical to lenders understanding if you will repay your debt. Stronger financial management lowers the lender’s risk and means you’re more likely to be approved. In particular, focus on these steps:
- Review your basic business finances.
- Increasing the cash flow for your small business.
- Keep your overhead costs, hidden costs, and other expenses down so you can boost your profit margins.
- Learn about areas like business debt schedules, working capital cycles, and fixed charge coverage ratios.
- Pay down your existing personal and business debt.
- Increase the revenue coming into your small business.
Increase Your Personal or Business Assets So You Can Provide Collateral
SBA loans often need to be secured against your personal or business assets. The greater the value of your assets, the more collateral you can provide, and the more likely you are to be approved for a loan. If you’re not able to provide enough collateral, you may still have other options.
Have a More Mature Business
Startups and new businesses are less likely to be approved for loans. They’re unproven and don’t have established credit histories, plus getting that early revenue and cash flow can be tricky. Established businesses that have a track record of at least two years are about twice as likely to get approved for an SBA loan.
I Don’t Want to Reapply for an SBA Loan, What Are My Other Options?
SBA loans are not the only game in town. There are many specialist lenders that can provide customized financing for your exact needs. Here at Connect2Capital, we specialize in matching small businesses with mission-driven lenders that can help. This means we can often help you get financing at reasonable rates and terms, to help your business grow. Start by visiting our small business loan marketplace to find funding.