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Why Was My SBA Loan Declined?: The Essential Guide

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SBA loans are the most coveted small business financing programs on the market. Considered the “gold standard of small business loans,” SBA loans provide the highest borrowing amounts at the lowest interest rates and most favorable repayment terms.

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The main drawback to the government-backed loan program is the difficulty in applying and getting approved. Both the SBA and SBA lenders carry high qualification standards.

As a result, most small business owners who apply are rejected. This guide covers why the SBA loan approval rate is low and what you can do if your business gets denied.

Specifically, we’ll answer these questions and more:

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    What are SBA Loans?

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    SBA loans are made available through the US Small Business Administration (SBA). The SBA partially guarantees SBA loans, allowing lenders to offer high borrowing amounts at lower interest rates and longer repayment terms. If the borrower defaults, the federal government pays for the guaranteed portion.

    There are multiple financing packages available within the SBA loan program. Small business owners apply to the specific loan program that meets their business needs.

    SBA loan options include:

    The various SBA loan options provide funding for most business purposes. Small businesses can use SBA loan proceeds for:

    The SBA does not approve loan applications, nor does it provide funding. Instead, potential borrowers apply to an SBA-approved lender, which will be one of three types of financial institutions: commercial banks, credit unions, or alternative online lending facilitators like United Capital Source.

    Once you apply to an SBA-approved lender, the SBA signs off on the loan. SBA-preferred lenders can approve the loan request without getting SBA approval first.

    Closing and funding the loan can take anywhere from a few weeks to 120 days, depending on the type of loan. Documentation issues can cause additional delays.

    What are the pros and cons of the SBA Loan program?

    SBA loans are often considered the most advantageous business loans available, but they are not without downsides. The application process is often long and tedious, and you must meet strict approval requirements.

    Here are the benefits and drawbacks of SBA loans.

    Pros:

    • High borrowing amounts – up to $5 million.
    • Low interest rates and long repayment terms.
    • You can use the funds for a variety of business purposes.

    Cons:

    • Lengthy application and approval process.
    • Large amounts of paperwork.
    • It might require collateral.
    • Almost always requires a personal guarantee & down payment.
    • Requires good to excellent credit.

    What is the SBA Loan Approval Rate?

    Approval rates for SBA loans vary by the type of institution. Here are the current approval rates by lending institution type:

    • Alternative online lenders: 57%.
    • Small banks: 49%.
    • Credit unions: 40%.
    • Large banks: 25%.

    What are the most common reasons SBA Loans get Declined?

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    One of the more challenging aspects of SBA loans is that you must meet both SBA and lender requirements. The SBA does not set minimums for personal credit scores, time in business, or revenue. It does, however, set basic eligibility and FICO SBSS requirements.

    Even if you meet the SBA’s requirements, each lender sets credit score, time in business, and revenue requirements. So, either the SBA or the lender can deny the application if the requirements aren’t met.

    Here are the most common reasons why SBA loans are denied.

    Didn’t Meet SBA’s Basic Eligibility

    Small businesses must meet these standards:

    • Be a for-profit business.
    • Operate and be physically located in the US or its territories.
    • Meet the small business size standards as defined by the SBA.
    • Have the cash flow to handle loan repayments.
    • Not be eligible for or receiving loan funds elsewhere (SBA loans are “last resort financing”).
    • Have invested time and money (equity) into the business.
    • Possess a commitment to success and relevant management experience.
    • Provide a personal statement attesting to having good character.
    • Cannot be incarcerated, on parole, or probation.
    • Cannot be currently under indictment or other forms of criminal charges.
    • Cannot have previously defaulted on federal loans, such as student loans.
    • Must own at least 20% of the company.

    Didn’t Meet FICO® Small Business Scoring Service™ (SBSS) Requirements

    You need to establish business credit before applying for an SBA loan. The SBA uses FICO SBSS scores to analyze a company’s credit.

    The SBSS aggregates the personal credit scores of up to five business owners (each at least 20%), the business credit score of the company, and financial data provided on forms 1919 and 1920.

    The current SBSS minimums are:

    • 7(a) Small Loans: 150.
    • Community Advantage: 140.
    • Express Bridge Loan Pilot Program: 130.

    Didn’t Meet the Lender’s Credit Score or Credit History Requirements

    Most business owners need good to excellent personal and business credit scores to qualify for an SBA loan. The general personal credit score range is 650-700.

    The exact requirement depends on the lender and the SBA loan. Even if you meet the credit score requirement, certain adverse reports in your credit history could trigger a denial.

    For example, a recent bankruptcy report might be a red flag for lenders. Also, if you previously defaulted on a government loan, such as a student loan, you won’t be eligible for an SBA loan.

    Issues with Cash Flow

    Cash flow is one of the most important qualifiers for SBA loans. The SBA’s guidance to lenders states:

    “The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.

    Put simply: if your business doesn’t have the cash flow to support repayments, you can’t get an SBA loan.

    Not Enough Collateral

    Most lenders require collateral for SBA loans. Generally, collateral requirements are as follows:

    • Loans up to $25,000: no collateral requirement.
    • Loans between $25K and $350k: Follows the lender’s collateral requirements for non-SBA loans.
    • Loans over $350: Collateralized to the “maximum extent possible.”

    The SBA states that lenders cannot deny an application based solely on collateral. However, it can contribute to denial if other factors are borderline.

    Equity Injection, aka Down Payment

    Most SBA loans require a minimum down payment of 10% of the loan amount. The SBA prefers to work with businesses that can contribute equity to the loan. In this way, all three parties share some risks – the borrower, the SBA, and the lender.

    If you can’t come up with a down payment, you might not get approved. There are some exceptions but expect to put at least 10% down for the most part.

    Time in Business

    Most lenders require at least two years in business, but some exceptions exist. For example, the SBA microloan is usually the loan most used for startups, and most lenders that offer it don’t require the same time in business.

    Annual Revenue

    Not every lender sets an annual revenue requirement, but it would be best to have annual revenue of at least $250k. Again though, the specific loan you’re applying for might have a different revenue requirement.

    How can I appeal an SBA Loan denial?

    The SBA does provide an appeal process if you believe you were denied in error. In most cases, you must file your appeal with the SBA’s Office of Hearings and Appeals within 45 days of your denial.

    The deadline to appeal might be different for some SBA loans. Be sure to check with the SBA when your specific appeal deadline is.

    When preparing an appeal, the first step is to determine why you were denied. Lenders are required to explain the rejection in the denial letter. If you need more details, you can contact the lender.

    Once you know the reason for the denial, begin gathering the documentation to support why the rejection was incorrect. For example, if you were denied due to cash flow issues, you’ll need cash flow statements proving you can support repayments.

    After preparing your documentation and appeal argument, you can file the appeal through the Hearings and Appeals Submission Upload Application or by email or fax.

    Appeals typically take 90 days to process. Some programs, like SBA disaster loans, have extended deadlines to appeal. You have up to 6 months to file an SBA disaster loan appeal with the SBA Disaster Assistance Processing and Distribution Center (DAPDC).

    How to Apply for an SBA Loan:

    If you are looking to apply, or reapply, for an SBA loan, you can follow these steps to apply through our lender network.

    Step 1: Ensure You Qualify

    You’ll need a credit score between 650-700 and a healthy, consistent cash flow. How you intend to use the money plays a significant role as well. You’ll need a detailed business plan of how the funds will help you invest in and grow the company.

    Step 2: Gather Your Documents

    Be prepared to provide:

    • Driver’s License.
    • Business license or certificate.
    • Voided Business Check (for business bank account information).
    • Bank Statements.
    • Credit Report/Statement of Personal Credit History.
    • Business Tax Returns.
    • Credit Card Processing Statements.
    • Personal Tax Returns – 3 Years.
    • Business Tax Returns – 3 Years.
    • Business Plan (Not in all cases).
    • Personal Financial Statement.
    • List of Real Estate Owned or Business Leases if applicable.
    • Debt Schedule/Loan/Rent/Lease Documentation
    • Deeds/Title/Ownership documentation for any collateral/Security
    • Current Profit & Loss Statements and Balance Sheet Year-to-Date
    • A/R and A/P Reports
    • United Capital Source 1 Page Application

    Step 3: Fill Out the Application

    You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

    Step 4: Speak to a Representative

    Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.

    Step 5: Receive Approval

    SBA Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed, funds should appear in your bank account in a few business days.

    Frequently Asked Questions

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    Here are some of the most common questions about responding to an SBA loan denial.

    How soon after a denial can I apply again?

    For most SBA loans, you can apply again within 90 days of submitting your application. However, we caution you to consider several important factors before reapplying.

    The most important thing is to ensure you rectify the reason for the denial. Reapplying without addressing the issues will cause more frustration and another denial.

    Secondly, most lenders perform a hard credit inquiry for SBA loans. You might want to wait a little longer to give your credit score to bounce back. Too many recent credit inquiries can cause a denial of credit.

    Finally, reconsider your lender. Some lenders provide lower qualifications or are more willing to work with you to perfect your application.

    What can I do to improve my SBA Loan application?

    The first things to focus on improving are the “5 Cs of Lending:”

    • Capacity: ensure you have the revenue, cash flow, and sustainability for repayments.
    • Capital: You can increase your capital by investing more equity into your business and coming up with the funds necessary for the equity injection or down payment for the loan.
    • Collateral: The more assets you can pledge as collateral, the less risk for lenders.
    • Conditions: Lenders want to ensure your business is viable and sustainable. Improving business plans and financial statements helps show you’re in a viable market.
    • Character: Most SBA applications require a personal statement that can demonstrate you have good character and are a responsible person.

    What are my alternatives to SBA Loans?

    Ultimately, SBA loans won’t work for every small business. You might need to build more business history or credit to qualify. Other times, you could be “too qualified” and be eligible for credit elsewhere.

    In any case, plenty of small business loans and financing options are available. Consider any of the following funding solutions for your business:

    SBA Loan Approval Rate & Denial Final Thoughts

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    You’re not alone if you applied for an SBA loan and were denied. Most small businesses struggle to qualify, with over 50% of applicants being rejected.

    You can take concrete steps to improve your application, whether applying for the first time, trying to appeal a denial, or reapplying for a loan. Following the steps above will help you boost your approval odds.

    One of the most beneficial ways to help qualify for an SBA loan is to work with an SBA lender that will help you with your application. At United Capital Source, our loan executives understand what the SBA lenders in our network are looking for. Contact us if you want to apply for an SBA loan or have additional questions.

    We will help you grow your small business.

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