Why Do SBA Loan Applications Get Rejected?
Applying for an SBA small business loan can be a great way to get funding, but it’s common for applications to get rejected. In fact, only around 1 in 10 SBA loan applications end up getting approved – so don’t feel bad if yours doesn‘t make it through! There are a few key reasons why SBA loans tend to get denied. Understanding these reasons can help you strengthen your application for next time.
Poor Credit History
One of the most common reasons SBA loan applications get rejected is because of poor credit history. The SBA has minimum credit score requirements, usually around 680. They also look closely at your past payment history – if you have late payments, collections, bankruptcies etc in the last few years it can hurt your chances.Improving your credit should be a top priority before reapplying. Pay all bills on time going forward, and consider contacting creditors to remove any erroneous negative items. Services like Lexington Law can also help dispute errors for you.
-High Debt-to-Income Ratio
Lenders want to see you have enough income left over after other debts to comfortably make the new loan payment. If your debt-to-income ratio (DTI) is too high, that can cause a rejection.Aim for a DTI under 50% before reapplying by paying down debts, especially credit cards. Increasing your income can help too – be realistic with cashflow projections on your application.
Insufficient Time in Business
The SBA generally requires businesses to have been operating for at least 2 years to qualify. Some lenders set even higher requirements of 3-5 years minimum. If you‘re a newer business, it can be tough getting approved.Consider alternative lenders like OnDeck or Kabbage that work with newer businesses. Building up more time in business also helps – document your growth trajectory to show lenders.
Low Annual Revenue
Lenders want to see your business has enough sales and revenue growth to support repayment. Common requirements are at least $250-500k+ in annual revenue. Lower revenue businesses struggle getting approved.Work on boosting sales before you reapply – update marketing, expand products/services, seek new customers etc. Provide realistic forecasts showing how you‘ll increase revenue. Seek lenders that work with your revenue size.
Insufficient Collateral
For larger SBA loans over $350-400k, collateral is often required. Not having property or other assets to secure the loan can lead to denial. Even if you have collateral, it may be considered inadequate to fully cover the loan amount.See if you can use business assets like equipment, accounts receivable or inventory as collateral first. Also consider a UCC blanket lien. Get assets appraised to verify their value. Reduce requested loan amount if possible.
-Errors or Omissions on Application
Many applications get rejected simply because they were filled out incorrectly or missing info. Rushing through applications and making mistakes is extremely common. But lenders need complete, accurate details to evaluate risk.Carefully review requirements and provide all documentation before submitting your application. Double check for any errors. Consider having a business consultant or SBA specialist review your full package first.
Risky or Ineligible Business Type
Some business industries are considered too risky or outright ineligible by SBA standards, leading to frequent denials. Examples include gambling, adult entertainment, speculative investing, pyramid sales, and illegal activities. Several other industries are also restricted.If your business category seems risky or falls under SBA exclusions, seek alternative funding like merchant cash advances, business credit cards, or private investors instead of SBA loans.
How to Reapply After Rejection
The good news is you can reapply for SBA financing even if you’ve been rejected previously. However there are some rules around timing and limits:
- Wait at least 90 days – You generally need to wait 90 days before submitting another application after being declined an SBA loan. This cooling off period gives you time to improve weaknesses that caused the rejection.
- 3 attempts per year – Within any 12 month period, the SBA only allows 3 total applications including all lenders. So use those chances wisely after carefully strengthening your application.
- Appeal within 6 months – You can request an appeal within 6 months if you believe there were any factual errors or disputes about why your particular application was denied.
Following up quickly with the lender about your exact reasons for rejection can help determine what needs remedying before you reapply. Be sure to get any denial letters and documentation for reference.The appeals process begins by contacting the SBA’s Office of Hearings and Appeals. But appeals are still uncommon, so focus first on improving weaknesses for your next application.
Alternative Funding Options
Even if you take all the right steps, SBA loans do still reject many qualified applicants simply due to limited funding availability and strict requirements. So it always helps to explore alternative financing options as a backup, such as:
-- Small business grants – Government and private grant programs exist to fund certain business types like minorities, women, veterans, tech startups etc.
- Business credit cards – Credit cards allow simpler approvals and can help build business credit for larger loans later.
- 401(k) Business Financing – Use retirement savings without early withdrawal penalties.
- Equipment financing – Fund specific equipment purchases through lenders like Nav.
- Merchant cash advances – Receive a lump sum in exchange for a percentage of future sales.
- Invoice factoring – Sell unpaid invoices to a factoring company to raise capital.
- Business lines of credit – Reusable funding similar to credit cards.
- Peer-to-peer lending – Borrow from a pool of investors.
- Hard money loans – Asset-based financing secured by real estate.
- Private investors – Connect with angel investors and VC firms.
- Personal loans – Some lenders provide personal loans for business use.
Key Takeaways
- SBA loan denials are very common, with around 90% of applications getting rejected. Don’t be discouraged if yours doesn’t get immediately approved.
- Typical reasons for rejections include poor credit, high debt levels, insufficient business history, low revenue, lack of collateral, application errors, and ineligible industries.
- You can reapply after 90 days and up to 3 attempts per year. Appeals are also possible within 6 months if you dispute the reasons given for denial.
- In the meantime, build your credentials and work on weaknesses that caused your application to be declined previously.
- Seek alternative funding sources like business credit cards, grants, merchant financing etc if SBA loans remain out of reach. With some perseverance, you can eventually get funding to grow your business.