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The Small Business Administration has repeatedly vowed to help more small businesses succeed. But in 2018, it can be argued that obtaining an SBA business loan is no easier than it was decades ago. This isn’t too much of a surprise considering SBA Loans are accessed through banks, which currently reject about 80% of applications for small business loans in general. Yes, SBA Loans are somewhat different from traditional bank loans.

It seems that a great deal of applicants, however, aren’t exactly sure just how different they are. This suggests that these applicants were equally unaware that being rejected for an SBA loan doesn’t necessarily mean they will never qualify for similar business funding programs from non-traditional business lenders.

Why SBA loans seem so accessible

The supposed main purpose of SBA Loans is to incentivize banks to approve more applications. Banks base their decisions on risk. The more security they have in the event of default, the higher the likelihood of approval. For banks, “security” usually comes in the form of collateral and/or readily available capital. Many hard-working and successful businesses do not have either requirement. SBA Loans were created to make up for the lack of security. The SBA reportedly guarantees up to 85 percent of loans up to $150,000 and up to 75 percent of loans over that amount and up to $500,000.

This gives the impression that businesses with less than the desired amount of available capital are finally within reach of SBA loans. There is less risk for the bank, which will make back a significant portion of the money it lends, regardless of what happens to the borrower’s business.

Not as “secure” as you thought

Before delving into exactly why you may have been rejected, it’s important to note that the SBA’s involvement in this process is strictly limited to financial backing. There are no specific guidelines that must be followed by banks that offer SBA loans. The decision is entirely up to them and is determined by their rules. In fact, there’s a good chance that the SBA didn’t even see your loan application. Only after a bank approves an application does it submit its own application requesting the SBA’s guarantee.

You wouldn’t know this because some banks will claim that they really wanted to approve your application, but the SBA said no. While the SBA does sometimes reject applications, most rejections are issued by the bank.

At first, the SBA’s guarantee of 75% or 85% of the loan appears to mitigate nearly all of the risk. The bank should therefore be much, much more likely to approve a borrower that isn’t made of money. But 85% is not 100%. That percentage is still technically just a portion of the money that is being lent. The SBA’s guarantee only makes the bank a little more generous with applications. So, an applicant for an SBA loan must still be heavily capitalized.

Common reasons for rejection

In most cases, SBA loan applications are declined due to issues with credit score, collateral, or cash flow. Despite the SBA’s guarantee, these are generally the same issues that would get you rejected for a bank loan. If your credit score isn’t flawless or close to it, your chances of approval are very slim. The SBA usually prefers its loans to be secured but applicants without collateral might not be rejected if they satisfy the other requirements with flying colors. Collateral is likely mandatory for applicants seeking the SBA’s micro-loan program. These loans may be more difficult to obtain because banks are naturally biased towards larger loans, which carry larger profits.

The cash flow requirements stem from the repayment structure of SBA loans, which involves fixed, monthly payments. So, if your business experiences seasonality or cyclical dips in revenue, you might have difficulty making payments when business is slow. Businesses of this nature also cannot accurately predict revenue throughout the coming months. This lack of certainty could dissuade the bank even further, since applicants are expected to put as much detail as possible into their business plans.

You are probably eligible for plenty of other options

If your business is prone to the aforementioned cash flow issues but has strong revenue overall, you will still likely be able to access affordable and highly advantageous small business loans. United Capital Source regularly works with businesses that, because of industry-wide or inevitable circumstances, cannot fulfill traditional repayment systems. Some of our business funding programs can even be approved during rough patches or when you are cash poor.

Unlike banks, we don’t only work with heavily-capitalized companies or companies of a certain size. Many of our clients are female business owners, who typically start their businesses with much less working capital than male business owners.

We also work with plenty of industries that are commonly stereotyped as “low-growth” or “risky” due to tumultuous cash flow, seasonality or fickle demand. These obstacles make businesses more likely to develop subpar credit, but this is in no way a “deal-breaker” for approval at UCS.

If you’re wondering how we can work with businesses with so many imperfections, the short answer is that we don’t just use a single repayment system. Most of the requirements for traditional bank loans or SBA loans stem from the borrower’s need to make fixed, monthly payments, no matter what. Borrowers must have enough cash on hand to continue making payments in the event of a minor or major setback. But, when you replace fixed monthly payments with a more up-to-date repayment system, virtually any thriving business can pay off debt without compromising cash flow.

SBA loans 2.0

Maybe you fulfill all but one requirement for traditional SBA loans, and would have been approved if you weren’t 100% perfect in that one area, like credit score or cash flow. Maybe the bank didn’t agree with how you were going to use the money or simply refuses to work with your industry. For these borrowers, we offer our own version of SBA loans called SBA “Marketplace” loans. Compared to traditional SBA loans, SBA Marketplace loans tend to carry lower interest rates, longer due dates and more convenient terms overall. While the repayment system is very similar to a traditional SBA loan, payments will most likely be lower and may be adjusted for inevitable dips in revenue.

Banks favor applicants who are projected to dramatically increase revenue in a relatively short time frame. SBA Marketplace loans, on the other hand, can be used to pay off existing debts or cover monthly business expenses during a slow period. We understand that revenue doesn’t stabilize or increase overnight. And sometimes, the key to making this happen is eliminating lingering burdens that restrict you from moving forward with growth.

The journey is far from over

Anyone who has been rejected for a small business loan knows what a disheartening experience it can be. But it’s really just another bump in the road. There might be some changes you need to make to improve credit or cash flow. The bank probably didn’t tell you what these changes are but we are more than happy to carefully lay out the next steps to take. Each step, which may include taking out a smaller loan, will only be recommended to bring you closer to becoming eligible for the amounts and/or terms you pursued in the first place.

Once your business is in better shape, the best business loan for you might not even be an SBA loan. Either way, working with UCS will show you new ways to grow your business, all of which are much more effective than simply asking for a lot of money.

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