SBA Loan Rejected
Small Business Administration (SBA) loans are one of the most popular small business loans. SBA loans are available to small business owners with favorable terms and competitive interest rates. SBA generally does not make loans. It guarantees loans made to approved lenders by the SBA.
What happens if your application is declined? We’ll discuss common reasons SBA loans may be denied and what you can do to fix it.
Minimum requirements for an SBA loan?
The following are the requirements for SBA loans:
- Businesses must usually:
- SBA size guidelines define small businesses as small.
- Not operate a business within an ineligible sector
- Operate a for-profit company
- Operate in the U.S. or U.S. territories
- Be able to have reasonable owner equity
- Not be eligible for loans similar to those offered elsewhere.
Possible reasons why your SBA loan application was rejected
Let’s look at the most common reasons an SBA loan might be declined.
Poor Credit Scores
SBA loans are not available to entrepreneurs with poor credit. To get an SBA loan, you must have good credit. However, the lender and loan program will determine what is considered good credit.
All owners who own 20% or more of the property are required to have their personal credit history checked by lenders. SBA guidelines generally require “acceptable credit” but don’t require a minimum personal credit score to be approved.
Some loans require that you have a minimum FICO score SBSS score to be approved. The business credit score can be combined information from both personal and business credit reports into one score.
Insufficient Cash Flow
The SBA loan will not be approved if the business cannot repay it. Cash flow is a crucial part of an analysis by lenders to determine if the business can afford the payments.
Financial analysis for existing businesses will be based on three most recent years’ financial information (tax returns, balance sheet with debt schedule and income statements) plus an interim financial statements such as a Profit & Loss Statement.
The Question of Collateral
SBA loans don’t require collateral. These loans are intended to be repaid by borrowers who have the collateral but not the collateral. The SBA will however require collateral to be pledged in order to secure the loan. If home equity is not available or if the business assets are insufficient to secure the loan, this could be required.
The lender does not need to accept collateral for loans less than $25,000. It is also worth noting that those who own 20% or more must give a personal guarantee.
A business buyer can be denied if they have an insufficient down-payment, also known as “equity injection”. The minimum equity injection required by the SBA is at least 10% of the total costs of a new business that is less than one year old, or 10 percent in case of a change of ownership. However, there are exceptions to this rule.
Available Alternative Credit
SBA financing is not available to small business owners who are eligible on the same terms for conventional small-business loans. This requirement is not important as the lender must prove that the borrower can’t get similar financing elsewhere.
Buyer Criminal History
Borrowers who don’t meet the SBA character requirements (primarily related to criminal record) could be denied. While a criminal record does not automatically disqualify applicants, those currently in prison, on probation, parole, or subject to criminal information or other criminal charges, will not be allowed to apply.
The borrower must complete a borrower information sheet that asks about their criminal history. The loan application will be denied if the borrower answers “yes” to question 17 regarding current incarceration and criminal charges. The lender will need to take further steps to verify eligibility if the borrower answers “yes” to questions 18 and 19.
Prior Defaults On Government Loans
SBA loans can be guaranteed by the SBA, up to a specific percentage depending on the loan program. The risk of default by a borrower on a loan that is not repaid and the SBA unable to collect can fall on the taxpayers.
If you have ever defaulted on an SBA loan, federal student loans, or federal tax debt, make sure to talk with your SBA Broker. Some federal debts are acceptable, especially if the borrower is on a formal repayment program.
Borrowers who default on federal loans may be denied an SBA loan.
What to do after a denial of a SBA loan
First, determine the reason your application was denied. Although the lender must send you a letter explaining why your application was denied, it may not always be easy to understand. If you are unsure, ask the lender for clarification. Ask questions until you are clear about why your application was rejected.
Determine if the reason you were denied was due to the requirements of the lender or an SBA requirement. This is the difference:
To collect the SBA guarantee, the lender must meet minimum standards. The lender can set its own policies as long as they do not discriminate against borrowers. Lender standards may differ by lender. They could include a minimum credit score, time in business or industry.
If denied, can you reapply to an SBA loan?
You might be eligible to reapply for an SBA Loan depending on the reason that you were denied, the type and status of the lender.
You may be eligible to request reconsideration if you were denied due to not meeting SBA requirements (small-business size standards, for instance, or industry). If you have a criminal record and were denied, you may be able to request reconsideration within six months.
You may not be allowed to reapply for up to one year in some cases, but you might be able request reconsideration. The SBA guidelines state that once your application is submitted to the SBA’s Loan Guaranty Processing Center (LGPC), a rejected application may not be approved by any other lender under for 12 months starting from the date of the rejected application.
Lenders may request reconsideration of loans if they believe the cause(s) of decline have been overcome. They will also need to be able to provide a detailed written explanation as to how the applicant has overcome those reasons. This must be done within six months of the date of decline. They must provide updated financial statements if they fail to do so within six months of the date of decline.
This means that you should seek advice from your lender if your application is denied for an SBA loan. Ask your lender for clarification on the reasons why you were denied and if they may reconsider your application. Talk to another lender if you feel that the lender is not a good match for you. You may be asked to wait or take additional steps before you apply again.
Six months have passed from the date of your original loan application being declined. You can apply for reconsideration within 30 days, or another 30 days if you are denied. If funds are not available, you have up to two years to request an increase in funding.
For more information, check out our SBA Loans FAQ.