4 Steps to Take If You Aren't Approved for an SBA Loan
In addition, as small business owners recover from the COVID-19 pandemic, having additional financing has become more crucial than ever. Most industries have been affected in some capacity, and business owners require additional capital in order to adapt.
One of the most common ways small business owners finance their ventures is through commercial bank loans. Due to this, U.S. Small Business Administration (SBA) loans are highly sought after due to their relatively low interest rates and flexible repayment terms.
However, for business owners with limited borrowing history or credit profiles, securing an SBA loan isn’t always easy. Fortunately, if your SBA loan application isn’t approved, you can improve your chances for next time, or secure business financing from another financial institution by following a few key steps.
What Should You Do If Your SBA Loan Application is Declined?
1. Determine Why Your Loan Application Wasn’t Approved
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 for a small business loan was rejected.
There are many reasons why you may not be approved for a small business loan from a traditional lender. For example, the lender may not loan to businesses in your industry, or you may have a weak credit history.
Whether you plan to re-apply for an SBA loan or seek an alternative financing solution, you’ll improve your business’s chance of success if you find out why you didn’t qualify. Once you know how to get approved for an SBA loan or another funding program, the application process will be much easier.
If your SBA loan application is rejected, you’re legally entitled to a written letter of explanation. When you contact the banker, ask them to get specific on why you weren’t approved for financing and how to get approved next time.
Understanding why you were denied can help you decide what path to pursue in the future. If you know what the lender requires, you can improve your credit score, monthly sales, or other financial components prior to applying again.
2. Improve Your Small Business Loan 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 other items quickly so that your application is approved next time.
SBA loan applications require significant paperwork, including detailed financial statements and legal documents. In addition, you’ll likely need to demonstrate that you have a solid business plan that details how you plan to use the funds.
If any supporting documents were missing from your original application or you provided incomplete personal information, take the time to ensure that everything is completed correctly before applying for a loan again. SBA lenders will take note of this attention to detail, and it could affect whether you get approved for funding.
It’s also important to note that you’ll be required to wait 90 days before applying for another SBA loan. Even if you’re confident you’ll qualify, you’ll need to wait until that time has passed.
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, which include:
- Your payment history
- Length of time in business
- Outstanding debt
- Company size
- Industry risk
If your score is low, you can improve it by taking these steps:
- Paying your vendors and suppliers on time
- Opening credit card accounts and paying your balances off regularly
- Keeping your debt and credit utilization low
Ultimately, it’s important to keep an eye on your personal and business credit reports. By doing this, you can ensure that there are no mistakes on your reports, and that you meet lenders’ score requirements prior to applying again.
4. Consider Alternative Business Funding Options
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
- Business lines of a credit
- Business credit cards
- Merchant cash advances
- Invoice financing
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.
Conclusion: Financing Options Are Available
As a small business owner, access to capital is critical for long-term success. In fact, 82 percent of small businesses fail due to cash flow problems. An additional 29 percent run out of cash altogether, per 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 option that better suits your business.
Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2022.
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.