Small Business Administration (SBA) is a federal agency that “serves to aid, counsel, assist and protect the small business owner’s interests.” Banks can be reluctant to lend to small businesses which makes it difficult to obtain SBA funding.
Many applicants don’t know why SBA loans are denied. Here are the five most common reasons why small businesses don’t get approved for a Small Business Administration loan, along with how to avoid them:
SBA Loans: 5 reasons why they are denied
1. Startups are considered
One of the main reasons why it is difficult to obtain an SBA loan is that you own a new business. Traditional lenders consider funding startups as “risky” and require that the business be at least 2 years old to approve a loan. If you have a consistent cash flow over a period of time, lenders are more likely approve your loan application. It is inevitable that every small business will start out somewhere. However, if you are unable to provide a bank with a revenue history it can be difficult to qualify for an SBA Loan.
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Alternative lenders give priority to how the loan is used, while traditional lenders are more concerned with the history of the business. To overcome the traditional lending hurdles, alternative lenders also consider different criteria, such as your Business Plan, revenue and credit history. It usually requires less paperwork and a quicker decision. If your small business needs to quickly pay off its outstanding bills, you may want to consider an small loan.
2. Inconsistent cash flow
Cash flow is essential to a company’s long-term growth and success. Cash flow is also one of the main factors lenders consider when assessing the health of a business or determining the ability to repay a loan. Insufficient cash flow is something that most lenders cannot afford to ignore. SBA loans may be more difficult to obtain for companies that are experiencing seasonal slumps. A landscaping company, for example, may not have as much cash in hand during the winter than in the spring.
What is the Fix?
If you are in a seasonally-driven industry, retail inventory loans may be a better option than an SBA. These alternative loans can be used by product manufacturers, retailers and distributors. They are also ideal for seasonal businesses. Short term business loans can also be ideal for seasonal operators.
3. Disorganized business documentation
It’s essential to have the required documentation at hand to make the application process as smooth as possible.
Some applicants do not take the time to fully understand the SBA requirements or prepare all of the required documentation by the bank. It can be difficult to understand the applications, but presenting incorrect materials could make you appear disorganized. Disorderliness can be interpreted by lenders as an indication of your company’s management, which makes it harder to obtain SBA loans.
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Preparation is essential for every goal. SBA loan applications follow the same principles. Lenders hold workshops all year long on how to apply and what lenders are looking for. You’ll also need the following:
* SBA Form 19
* Personal background and financial statement
* Financial statement for business (three years of annual profit and loss statements, balance sheets and reconciliation of net worth).
* Certificate of business or license
If you have any history of loan applications, please include it.
Tax Returns
* Resumes
Many online resources are available to business owners when they prepare a loan request. Use this useful checklist on the SBA website.
4. Low Credit Score
Low credit scores can make it difficult to obtain an SBA loan. is a risk-averse company and will usually require that borrowers have a FICO Score above 650. Your personal and business credit scores may be considered. Your business’ credit score is based on a number of factors including the payment history you have with your suppliers and how long you’ve been in business. Your credit score may indicate that lenders will have difficulty in obtaining a loan, even if you are making other payments each month.
What’s The Fix?
Although a low score can make it hard to qualify for an SBA loan it does not mean that you’re shut out of the credit market. FICO provides several tips including:
* Pay your bills in full by the due date.
* Do not open new credit cards that you do not intend to use.
* Resolve any missed payments to stay current.
5. No Established Business Credit
You will have a better chance of getting a loan if you already have reputable business credit. Lenders want to know that you can pay your business bills on time. If a lender doesn’t have business credit information for a borrower, they will often look at the personal credit history of the business owner to get an idea of how they handle debt. Lenders are more likely to use this approach when evaluating the application of a new business owner. SBA prefers to see business credit history, another reason it is difficult to obtain an SBA loan.
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Most small business owners are unaware that they have a credit score for their business or don’t know how it is calculated. Your business credit score may affect your insurance rates, lease agreements and vendor terms. It’s important to pay all your bills on time and in full.
You can build your business credit if you do not have it yet. To start, register as an LLC, or another legal entity. You can also check if you already have a federal employer ID number. This is available through the IRS. You can also get one from the IRS.
A SBA loan refusal doesn’t mean the end. This can be a start to a new adventure. We work hard at QuickBridge to ensure that small businesses have the funds they need to be successful. We offer a faster application process, minimal paperwork, and quicker decisions. Contact us now to get started.
For more information, consult your tax advisor or an accountant.
