Have you had an SBA loan application denied? That’s not the best news to get, but the good news is that there are steps you can take to improve your approval odds for next time!
That’s what we’ll cover today in this in-depth guide for what to do if your SBA loan has been denied. We discuss why you may have an SBA loan denied, whether you can reapply, and other options that you can utilize if reapplying isn’t an option.
Ready? Let’s go!
Find out why your SBA application was denied
If and when your SBA loan application is denied, by law you should receive a written explanation detailing the reason(s) for the rejection. That explanation should come directly from the bank or lending institution that you applied through, so if you don’t get one make sure to ask them!
Knowing why your SBA loan application was denied will provide you with valuable insight that can help you choose how you want to proceed. For example, if you made a mistake on your application, there’s a chance that you could get approved if you just correct those errors and apply again. On the other hand, if your credit score is not sufficient to qualify for an SBA loan, you’ll probably want to work on repairing or improving it before applying again.
If your SBA loan application is denied, don’t feel too let down – particularly now in the wake of the economic pressures that have followed COVID lockdowns.
In a broad sense, small businesses have been facing a difficult time since the unwelcome introduction of the Coronavirus pandemic (and the subsequent lockdowns that swept across the globe). But when it comes to loan approval rates more specifically, 2020 saw a sharp decrease as a result of the economic instability brought on by COVID.
According to monthly reports released by Biz2Credit, small business loan approval rates at small banks stood at 18.5% in September 2020 – a slight increase from the low point in April 2020 when small business approval rates at small banks stood at 11.8%, but still far from the 50.3% approval rates in February 2020.
In short: You may face more difficult odds at getting approved for SBA loans while Coronavirus continues to be a factor. Keep in mind that, at this time, SBA loan rejection may be saying more about the state of the economy and the lending market than it does about the health & stability of your business.
Can I reapply if my SBA loan application was denied?
You can reapply for an SBA loan application if you were denied, but the question is should you?
There are certain reasons for SBA loan rejection that you might not have any control over, like the business not having a long enough history for example. In that instance, all you can really do is wait for time to pass.
Alternatively, if your business was denied an SBA loan for not having enough monthly revenue, there are actionable steps you can take to correct for that shortcoming and improve your funding odds before applying again.
Here are a few ways you can better your odds of SBA loan approval:
Strengthen business & personal credit scores
SBA loans have some of the best terms in the small business lending marketplace, and for that reason, they tend to have stricter requirements than other types of business loans not backed by the SBA. While credit score requirements vary depending on the exact type of SBA loan you apply for, having too low of a credit score is one of the more common reasons for having an SBA loan denied.
Start working on your credit now. Strengthening your personal and business credit scores is always a good idea, even before applying for an SBA loan.
Side note: The 5 Cs of credit are helpful for building up your business’s creditworthiness in the eyes of lenders – learn what they are, how they work, and how to start improving them in order to increase your business’s fundability.
Improve business cash flow/financials
Is your business in the financial position to repay a loan? That’s one of the main questions that lenders will ask when considering your business’s eligibility for funding through the SBA.
It would be wise for you not to wait for your lender to ask that question for you to start improving your business’s cash flow! There are a variety of ways to increase profit for your business and they all help your business’s chances of getting approved for an SBA loan.
The bottom line: The more money your business is making the more capable it is of repaying a loan, and the lower the odds are of getting your SBA loan denied.
Don’t apply again too quickly
Another big reason for having an SBA loan denied is if your business is too young. The ‘age restriction’ is less about your time in business and more about whether your business can prove its ability to pay the loan back. For that reason, if you have your SBA loan denied it’s a good idea to wait a few months before applying again.
Technically, you must wait a minimum of 90 days to submit an SBA loan application again. Invest that time in strengthening your credit score, improving your cash flow, and any other ways that you can decrease the chances of having your SBA loan denied again.
If you have more questions about SBA loans, take a look over these useful resources:
What other options are there aside from SBA loans?
If you’ve had an SBA loan denied, you may face better odds of obtaining the funding you’re aiming for by seeking out alternative business loans.
In any case, SBA loans aren’t actually provided by the SBA anyway – the applications and the funding are handled by the bank or lending institution you apply through. That being the case, you may as well do some digging to find out what other types of financing you may be able to qualify for.
Here’s a quick look at some funding solutions available in Become’s online lending marketplace:
Unsecured business loans
With no form of collateral needed, unsecured loans help you keep your personal and business assets out of jeopardy in the event that you fail to repay. Since that naturally means higher risk for the lender, unsecured small business loans tend to have shorter repayment periods and relatively higher interest rates.
All of that said, unsecured business loans are very flexible with regards to how they can be used to improve your business. Whether it’s to make renovations to your physical store, to invest in taking your business online, improve productivity, or any other business expense – unsecured loans can be extremely useful for meeting your business goals.
Business lines of credit
Business lines of credit essentially work the same as a credit card, where you have access to funds up to a certain limit and you’re only required to pay interest on the funds you actually use.
Granted, a business line of credit isn’t useful for every business expense. They’re more suited to cover smaller ongoing costs or emergency expenses that arise unexpectedly. Business lines of credit won’t be the ideal option if you have a bigger business project in mind and you need funding to help cover the costs. In that case, you may want to turn back to unsecured business loans.
While equipment financing is restricted to being used for purchasing or repairing business equipment (go figure!), there is a great advantage that you may not be aware of: when you obtain equipment financing, the equipment will often serve as its own collateral. That means you won’t need to put other assets on the line in order to secure a business equipment loan, making it less risky for you and your business and also increasing your odds of getting approved for funding.
Different types of SBA loans
There are several different types of SBA loans that exist and they do vary quite a bit, so you’ll want to understand what each kind is meant for so you can determine which one meets your business’s financial needs the best.
Here’s a quick overview of a few different types of SBA loans and alternatives in case your SBA loan is denied:
SBA 7(a) Loans
This type of SBA loan can be used to cover a wide range of different business expenses, and is backed by the SBA by up to 85%. Collateral is not always required, but may be depending on the size of your loan which maxes out at $5 million.
Best alternatives for an SBA 7(a) loan: Depending on the size of the loan (and whether or not you would be required to provide collateral for the SBA 7(a) loan), you would either want to apply for a secured or unsecured term loan.
The funds can be used for a variety of purposes, similarly to an SBA 7(a) loan – but, of course, there would be no SBA guarantee which would likely mean stricter qualifying criteria from lenders.
SBA 504 Loans
These are loans of up to $5 million specifically designed to help finance the purchase of real estate, buildings, or business machinery. Generally speaking, the assets being purchased or developed will serve as collateral for the loan. There is one small catch, and that is your business must have a net worth of no more than $15 million – a restriction that most businesses that qualify as “small” won’t have to be concerned about.
Best alternative for an SBA 504 loan: If your SBA 504 loan is denied, your next best bet would be to apply for business equipment financing. The same way that 504 loans typically consider the assets being purchased as collateral on the loan, equipment loans consider the piece of equipment being financed as security.
Both SBA 504 loans and equipment loans are restricted in terms of what they can be used for, so you won’t be sacrificing any flexibility in that regard.
These are revolving business lines of credit of up to $350,000 that have a maturity of 7 years, after which business owners can apply for an extension on the line of credit. Unlike other types of SBA loans, these have an exceptionally fast turnaround time of 36 hours but also an SBA guarantee of only 50% (compared to 85% on SBA 7(a) loans). While it’s more of a ‘quick solution’ than some other SBA loan types, SBAExpress loans are still a highly desirable form of business funding.
Best alternative for an SBAExpress loan: The answer here is pretty obvious – in place of an SBAExpress loan, you can try applying for a revolving business line of credit that won’t be backed by the SBA.
You may still be able to qualify for a revolving line of credit but the credit limit could be smaller and the term could be shorter. But, for all intents and purposes, your business would be able to utilize the funds for the same sorts of business expenses.
SBA Export Working Capital Program (EWCP)
As the name implies, loans under the SBA Export Working Capital Program are meant to help businesses that generate sales through exports. Loan sizes max out at $5 million with up to 90% coverage on the principal amount and must be repaid within one year. According to the SBA, these EWCP loans may be used for the following purposes:
- To pay for the manufacturing costs of goods for export
- To purchase goods or services for export
- To support Standby Letters of Credit to act as bid or performance bonds
- To finance foreign accounts receivable
Best alternatives for an SBA EWCP loan: The answer here truly depends on what your business intends on doing with the funds. The EWCP exists in the first place because, according to the SBA, “Most banks in the U.S. do not provide working capital advances on export orders, export receivables or letters of credit.” So, naturally, there is no perfect replacement for an SBA EWCP loan.
One useful alternative to help pay for manufacturing costs or goods/services for export could be an unsecured business loan. For the other export-related expenses covered by EWCP loans, you may be hard-pressed to find viable solutions.
The SBA CAPLines program provides lines of credit to help businesses meet their short-term financial needs. There are four types of SBA CAPLines:
- Seasonal – available for businesses with at least 1 year of operation and that can “demonstrate a definite pattern of seasonal activity”. Funds must be used to finance seasonal increases, not to survive slow seasons. Credit line amounts correlate to projected increases in seasonal costs and amount is repaid at the end of the season.
- Contract – available for businesses that have a contract to complete a project and need help covering the associated labor and/or material costs, and have a demonstrated history of being able “to complete such project on time and at a profit.” Credit line amount maxes out at $5 million with a maturity of up to 10 years and the line may be revolving or not.
- Builders – available for construction companies that have a demonstrated ability to complete such projects. Funds may be used specifically for construction or renovation expenses for the project in question. Credit line amount maxes out at $5 million with a maturity of up to 5 years, though the funds must be repaid within 36 months of the completion of the project or sale of the building – whichever is shorter.
- Working Capital – available to businesses that qualify for SBA 7(a) loans, plus they must also have inventory or generate accounts receivable. Fund may be used for any short-term expense besides paying back delinquent taxes or paying for floor planning. Credit line amount maxes out at $5 million with a maturity of up to 10 years and the line must be revolving.
Best alternatives for an SBA CAPLines loan: Seeing as CAPLines are lines of credit, if your SBA CAPLines loan is denied you’ll probably want to look at applying for another line of credit that doesn’t get the added benefit of being backed by the SBA.
Typically, businesses may have a hard time accessing a line of credit right before a seasonal spike or just prior to beginning a big project, so it could be a better idea to apply for a line of credit now just so it’s there if you need it.
Remember, you’re only required to pay interest on the funds you use through a line of credit, not on the entire amount available through that line. So there’s really no harm in applying for a business line of credit and not using it right away.
Take a deep breath
It’s going to be okay. Having an SBA loan denied isn’t fun, but it’s also not the end of the world for your business.
It’s a fact that SBA loans can be pretty difficult to qualify for compared to other types of business loans, so you shouldn’t feel too let down if you apply and get denied.
Instead, what you should do is take a deep breath in, consider the options and information discussed above, and make a move to better your odds of getting funded!