Why Was My SBA Loan Declined?

An SBA loan provides one of the greatest financing options for small businesses. Guaranteed by the Small Business Association, these loans are offered by banks and online lenders though the program can differ depending on the requirements of the borrower.

Because 80% of the loan is guaranteed by the SBA there is a reduced risk to the lender. 

The SBA offers various loan programs some of which include the 7 (a) loans and 504 loans. Essentially, the SBA doesn’t provide these loans directly to the borrower, however, they set the guidelines for the lending institutions to follow.

A benefit of SBA loans is that they are much more accessible to small businesses. 

In some instances, the SBA will deny your request for a loan and there are many reasons for this. Below, we have identified several reasons why your SBA loan was declined, how you can respond to this, and what to consider before reapplying for funding in the future. 

Why Was My SBA Loan Declined

First, you will need to find out why your loan was declined. In fact, you are legally obligated to receive a written letter that explains in detail, the reasons why your loan request was not approved.

This will be provided to you via the bank or lending institution that you submitted an application to, however, on some occasions, it may come directly from the SBA. If you do not receive this letter, you will need to contact the institution and ask them to send you one.

Understanding the reasons behind the decline will place you in a better position because you will have a clearer understanding of what they require and where your application was lacking.

Unfortunately, these letters can sometimes be rather vague, which of course is not very helpful to you. However, there are many loan specialists available who can apply their expertise to the case.

Not only will they be able to provide you with reasons as to why your request was turned down, but they will also be able to advise you on what you will need to do next.

Reasons why your loan application was denied

Here are some reasons why you may have been denied an SBA loan. In some cases, applications will be denied for one reason, and in other cases, applications may be denied for multiple reasons.

A low credit score or a bad credit history (red flags) - a low credit score or poor credit history makes it much more difficult to borrow money, as many institutions will become much less willing to lend. 

Also, lenders will be more hesitant to lend to business owners who have recently gone bankrupt.

Inadequate collateral - collateral refers to something that is pledged to secure the repayment of a loan. A lack of collateral presents a greater risk to the lender should the borrower default on their loan.

Issues relating to character (felonies) - lenders will often deny individuals who have a criminal record and a history of multiple felonies. In many cases, character profile will be an important part of the criteria.

Existing debt - if you have existing debt, some lenders and institutions will be less willing to approve you for a loan because you don’t have the capacity to repay the debt of this loan and the one you already have.

Not enough capital available for repayments - A lack of capital and business revenue also provides another reason as to why your application may have been rejected by the lender. 

Failure to repay another government loan - if you have another government loan which you have defaulted on, of course, the SBA isn't going to be satisfied with providing you with another loan, as there is a risk that you may fail to repay this one too.

What should you do next if you were denied an SBA loan?

If your application for an SBA loan was denied, you may be questioning what steps you should take next. 

Supply an email for reconsideration

It is possible to email or write a letter to the SBA to ask them to review your application and possibly reconsider you for the loan. It is worth noting that this will not always be effective in changing the outcome.

Some lending institutions will remain firm with their decision but if you have identified any errors in your credit report, it is worth contacting them and querying a reconsideration.

Improve your application

When you apply for an SBA loan, they will have requirements in place which you will need to meet before being approved. If you were declined with your first application, the likely reason is that it was too weak.

Because of this, you should focus on strengthening your application before considering applying again. Many SBA loan applications ask for a hefty amount of paperwork and documentation.

If you were previously denied it may be because your application lacked the necessary supporting documentation.

Remember that lenders will pay close attention to every detail in your application so to improve your chances of being approved again you must ensure that your application is completed with all of the necessary documentation and paperwork.

Work on your credit score

To put yourself in a stronger position when reapplying for an SBA loan, you will need to work on improving your credit score.

This is because your credit score has a huge impact on whether or not you will be approved. Both your personal and business credit score can affect your application. 

Your credit score is influenced by several factors and will account for any existing and outstanding debt, your payment history, the size of your company, and how long you have been in business. 

To strengthen your credit score you must ensure that you pay your business and personal bills on time. You can also open credit accounts and make sure that you make regular payments to them.

Furthermore, you will also need to keep your debt low. Adopting these strategies will help you to improve your credit score and will also eliminate any mistakes in your credit report.

Improve the cash flow of your business

Besides improving your credit, you will also need to improve the cash flow of your business. When considering whether you are eligible for a loan, the lending institution will assess whether your business can make the repayments.

Of course, to arrive at this decision, they will look at the profitability of your business and whether you have any debt. 

Improving the cash flow of your business will show lenders that you are in a position where you are able to make your repayments. 

Wait a while before reapplying

Though it may be tempting to reapply for an SBA loan shortly after you have been declined, it is recommended that you wait a while before doing so.

Whilst these loans are predominantly intended for start up businesses, it is these business owners that encounter the most challenges during the application process.

This is because a newly established business has not existed for long enough to show that they can meet loan repayments by their deadline. 

For this reason, you should hold off reapplying and instead wait a few months as you will then gain more experience within the business.

During this time, you should also focus on other aspects of the business that we have mentioned above. For example, you can work on generating revenue and strengthening your credit score. 

Consider other business funding options

If you have been denied an SBA loan, do not be discouraged as there are many other funding options available. You will need to do research to discover alternative options that you are eligible for.

If you were not approved for your loan with the SBA because you haven’t been in business for long enough or your credit score requires improvement, some flexible financing options will accommodate your situation.

Some examples include small business loans, online lenders, invoice financing, business lines of credit, and hard money loans.

Final Thoughts

Although being denied for your loan request isn’t can be upsetting, there is often a reason behind it. Remember that SBA loans are rather selective so applications are faced with more challenges during the process.

Finding out why you were denied will prove extremely helpful in allowing you to progress forward and work on future funding applications. Take the time to work on improving different elements of your business and once you have allowed enough time to pass you can then apply again.

If you don’t feel as though an SBA loan is right for you, there are several alternative funding options that you may feel are better suited to your business requirements.