As I mentioned before, SBA loans are among the best financing options available for small business owners. SBA Loans come with relatively low interest rates and long repayment terms. SBA loans offer a financing option to small businesses after other options haven’t panned out.

SBA loans are not for every small business owner. Bank lenders are selective and end up denying hundreds of applications.  According to Biz2Credit Small Business Lending Index™ (May 2018 figures), big banks approve roughly 25.9% of SBA Loans. However, this approval rate has increased from a rate of 8.9 percent as documented in 2011 by Biz2Credit Small Business Lending Index™. Among regional and community banks, the approval rate is 49.4 percent according to the same May figures.

The feeling of rejection can sting for the time being, but know that 50.0 percent of all applicants are not approved. With that knowledge, small business owners should understand why the denial letter was sent. Use this time to address application weaknesses prior to searching for other business financing options. Lastly, remember that although you have been denied once, there are other SBA bank lenders and SBA non-bank lenders who may approve the loan. Do not let the sting linger. Move on and try again.

With the feeling of rejection, small business owners should understand the why behind not being approved. Over the past three years, I have seen four common reasons as to why borrowers are disqualified for SBA loans.

1. Lack of Collateral

The SBA requires collateral as security on most, if not all, SBA loans. Reason being, secure assets like real estate and equipment are of value to the SBA lender because a lender can easily sell, to satisfy debt balance should the guarantor of the loan default. For instance, when a home buyer applies for a conventional mortgage, the home acts as collateral in case of default.

There are very few instances where 100% financing is approved without collateral. According to the SBA, “the SBA will generally not decline a loan when inadequacy of collateral is the only unfavorable factor.” In other words, a small business owner may not be rejected on the sole basis of not having sufficient collateral.

2. Lack of Strong Cash Flows

Cash flow is one of the first items that bank lenders observe when deciding whether or not to approve the loan. If cash flow is strong, there may be no need for collateral. However, there are very few business models that have strong cash flows.

Cash flow is important based in part that cash from the business is used to not only cover the expenses of the business but the SBA loan payments in question. It is not only important to pay back the loan but to have sufficient cushion if there is a downturn in the business.

Cash flow management is a cause for why many businesses fail. However, there are ways to improve cash flow management. Through the use of accounting software, a small business owner can monitor cash flow on a daily and weekly basis and can discover ways to improve the cash conversion cycle.

3. Poor Credit

The SBA does not have a minimum personal credit requirement, but most bank lenders expect good to excellent credit. Most lenders will want to see a credit score of 680+, as it exemplifies the borrower has a history of paying bills on time. In the case of many small business borrowers, adverse events for both personal and business credit histories are common. Bank lenders will inquire as to these events in order to ascertain a plausible explanation and whether or not the borrower acted responsibly and in good faith.

If a low credit score results in not being approved for a loan, there are many options for borrowers to review and take steps to repair a credit score.

4. Risky Industry

Depending on the bank, some industries are simply considered “risky”. An industry could be considered risky for a number of reasons like. In addition, if the business in question operates in certain “vice” industries, such as gambling, a borrower could potentially face extra hurdles. When selecting an SBA lender, inquire as to whether or not they service the industry for which the business operates in. If not, move on and find a different SBA lender.

There are several SBA non-bank lenders that prefer individuals that were passed on at least once. If assistance is needed, feel free to reach out. I want to help. No business should have to struggle because of lack of financing. Contact me at ryan@peakbusinessvaluation.com.