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4 Steps to Take If You Aren't Approved for an SBA Loan
September 24, 2018
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4 Steps to Take If You Aren't Approved for an SBA Loan

Whether you’re a new business owner trying to meet routine operational expenses or a veteran in your industry hoping to expand, accessing necessary capital can be challenging.  One of the most common ways small business owners finance their ventures is through commercial bank lending, and U.S. Small Business Administration (SBA) loans are highly sought after due to their relatively low interest rates and flexible repayment terms.

For business owners with limited borrowing history, securing an SBA loan isn’t easy — according to the Biz2Credit Small Business Lending IndexTM, just 26.5 percent of credit applications made by small businesses were approved by big banks in August 2018. Fortunately, if your SBA loan application isn’t approved, you can improve your chances for next time, or secure capital elsewhere by following a few key steps.

What Should You Do If Your SBA Loan Application is Declined?

1. Ask the Banker for an Explanation

According to Nav’s Small Business American Dream Gap Report, 45 percent of small business owners who are denied financing get turned down more than once, and 23 percent don’t know why their application was rejected.  There are many reasons why you may not be approved for a loan; you may be in the wrong industry, have a weak credit history, or simply need to put up collateral. Whether you plan to reapply for an SBA loan or seek an alternative financing solution, you’ll improve your chances of success if you find out why the bank turned you down.

If your SBA loan application is rejected, you’re legally entitled to a written letter of explanation. Make sure you ask the banker to get specific. Understanding why you were denied can help you decide what path to pursue next.

2. Improve Your Application and Reapply

While some things are out of your immediate control — for example, your length of time in business — you may be able to improve upon some other items quickly so that your application is approved the next time. SBA loan applications require a lot of paperwork, including detailed financial statements and legal documents. Additionally, you’ll likely need to demonstrate that you have a solid business plan and provide a detailed explanation for how you plan to use the funds. If any supporting documents were missing from your original application or were incomplete, take the time to make sure everything is completed correctly before reapplying.

3. Understand Your Business Credit Score

According to the NSBA Small Business Access to Capital Study, 20 percent of small business loans are denied due to weak or nonexistent business credit. While you may keep a close eye on your personal credit score — which can also be used to determine whether you’re eligible for an SBA loan — many business owners aren’t as familiar with their business credit score.

Business credit scores are impacted by several factors, including your payment history with suppliers, length of time in business, outstanding debt, company size, and industry risk. If your score is low, you can improve it by paying your vendors and suppliers on time, opening credit accounts and paying them regularly, and keeping your debt and credit utilization low.

4. Look for Alternative Sources of Funding

The good news is that SBA loans aren’t your only option when it comes to funding your business. If the bank determines that you haven’t been in business long enough to qualify for a loan or your credit score needs improvement, research which alternative sources of funding are available to you, such as a business loan from an alternative lender, bootstrapping, business lines of a credit, or crowdfunding.

In addition, online lenders are typically more flexible than banks with their lending standards, and some cater specifically to new businesses. You may be able to find an alternative lending solution that fits your needs while helping you grow your business.

As a small business owner, access to capital is critical for long-term success. Indeed, 82 percent of small businesses fail due to cash flow problems, and 29 percent run out of cash altogether, according to a study from InsuranceQuotes. Although an attractive option for many small business owners, SBA loans can be difficult to secure, and you may not qualify if your business is relatively new. However, with the right course of action, you can improve your chances of being approved for a financing solution that better suits your business.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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