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Why Was Your SBA Loan Denied?

By Erin Ryan Reviewed By Mike Lucas
By Erin Ryan
By Erin Ryan Reviewed By Mike Lucas

Your Small Business Administration (SBA) loan request can be turned down for any number of reasons. While SBA loans are known for their competitive interest rates and repayment terms, the road to approval can be rocky and sometimes end in disappointment.

Whether you’re in the midst of applying for an SBA loan or were recently declined for one, knowing the reasons why your SBA loan was denied can help you secure funding in the future. 

Common Reasons To Be Denied for an SBA Loan

There are several common reasons to be denied for an SBA loan. When lenders evaluate applicants, they consider the 5 C’s of credit, which could present specific disqualification factors. Other applicants might not meet the business criteria set forth by the SBA. 

SBA Loan Disqualifications

Business owners applying for an SBA loan could be denied for 1 or more of the following reasons.

  • Poor credit history or low credit score
  • Substantive character issues (e.g., multiple felonies)
  • Insufficient collateral
  • Lack of capital to repay the loan
  • Too much outstanding debt
  • Default on another government loan
  • No true financial need is evident (e.g., applicant has a surplus of assets)
  • Active tax lien or judgment 
  • Ineligible industry (e.g., gambling, lending, investment) 
  • SBA business size standards not met

If you haven’t applied yet or are looking to reapply, it’s important to keep approval factors in mind so you can avoid being denied for an SBA loan. For example, know what credit score you need, consider saving capital for a down payment and be sure to pay your personal and business bills on time.

Blue background with image of mine being dropped on a heap of red papers with X’s on them.

COVID-19 SBA Loan Programs  

If you’re like many business owners, the coronavirus pandemic has affected your company in one way or another. Furloughs, declining revenue, past-due receivables, evolving customer expectations and more have impacted entrepreneurs throughout the country. 

Cue COVID-19 EIDLs (Economic Injury Disaster Loans) and PPPs (Paycheck Protection Program). In response to the changing climate, the SBA began offering these loans in early March and April of 2020, respectively. 

As of July 31, 2020, the SBA had received more than 14 million COVID-19 EIDL applications. However, loan requests of more than 10 million applicants weren’t approved.

In addition to some of the reasons for loan denial previously listed, here are some reasons applicants were denied for economic relief.

EIDL: Reasons Loans Were Denied 

  • Business is too new
  • Economic injury not substantiated 
  • Application expired due to lack of response from applicant
  • Missing documents or incomplete application
  • Applicant did respond to requests for information within 7 days of being notified

PPP: Reasons Loans Were Denied

  • Poor credit history
  • Insufficient documentation of payroll expenses
  • Lack of Schedule C to prove net income (for sole proprietors)
  • Franchise not listed on SBA franchise directory
  • Not in operation prior to Feb. 15, 2020
  • Business has a 20% owner with prior guilty plea or felony conviction

Additionally, many banks were only taking PPP loan applications from applicants with which they had an existing relationship, giving many business owners no opening to apply. Other lenders prioritized larger loan requests. Ultimately, loan funds from initial relief packages were exhausted by the time many applications were received.

Blue background with graphic of a hand holding a red paper with an X on it and question marks around the paper.

Your SBA Loan Was Denied: Now What?

Be Clear About Why You Were Denied

First things first. Regardless of the type of SBA loan you applied for, it’s important to have an understanding of why you were denied for an SBA loan. 

Once you receive your letter of denial, speak with your SBA lender to see if you can gather more insight into the reasoning for the decision. Denial letters can be vague, but your lender can give you a clearer picture of why you were likely not approved. This will help you know what factors you need to work on going forward.

Do you need a loan for your small business?

Submit an SBA Reconsideration Email or Letter

You could petition the SBA to rereview your file and present information to dispute the result and ask for reconsideration. 

Keep in mind, in some instances, requesting a reconsideration won’t change the outcome, such as if your business engages in an activity that disqualified you from being approved. But if you’ve found errors on your credit report, for instance, that could be a viable reason to request a reconsideration.

  • On another note, if you disagree with the outcome of your COVID-19 SBA disaster loan request you can formally ask for a reconsideration within 6 months of the date of your decline letter. 

    Applicants interested in submitting a follow-up request, can send an email or mailed letter. In addition to summarizing the cause for denial and including a reason the SBA should reconsider your request, include the following information:

    • Application or loan number
    • Business name and address
    • Borrower name
    • Tax ID or employer identification number or Social Security number
    • Copy of more recent business tax returns prior to the pandemic, with schedules included
    • Signed and completed IRS form 4506-T
    • Copy of voided check from the business bank account

    Be sure to include up-to-date contact information as well. 

    Contact information for where to send an SBA disaster loan reconsideration email or letter.
    Source: SBA Frequently Asked Questions, COVID-19 Economic Injury Disaster Loan (EIDL)

Wait It Out and Apply Again

If you’re denied for lack of collateral, credit history or capital and aren’t in a rush for funds, think about giving yourself a bit of time and applying again. Take a few months to shore up your business finances as well as personal and business credit. 

Think about new ways to generate more revenue or reduce expenses. If you have existing debt, work on paying it down. Additionally, if you’re a newer company, waiting several months to a year will give you more time in business. Waiting it out could also mean a better cash-flow scenario, another factor an SBA lender evaluates when determining whether to loan funds.

Also, if you applied for a PPP loan and were denied, consider applying again when applications start to be taken. The second round of legislation has earmarked $284 billion for small businesses, particularly those that did not receive financing in the first round.

Seek Other Funding Options

If you’ve been turned down for an SBA loan, there are other options. Here are a few alternatives, including those specifically fitting if your credit score has seen better days.

Small Business Grants

Small business grants are essentially free money because they don’t need to be repaid. What’s more, credit scores typically aren’t a factor considered for awards. 

Investors

Angel investors may pay less importance to a borrower’s credit score than credit history, as the latter can reveal more information, such as a pattern of defaults, for instance. Additionally, if there’s high return-on-investment potential, angel investors may fund startups, which have minimal credit history and, as such, may not fare well with the SBA approval process.

Hard Money Loans

Hard money loans are short-term loans secured by property, often real estate, so credit score and revenue aren’t strong considerations. Your collateral’s value is the primary consideration for lenders.

Alternative Financing

Many online lenders and alternative lending marketplaces offer financing to applicants who may have been denied an SBA loan for not meeting credit requirements. In fact, you might find that you can obtain alternative financing with a credit score of 500. 

Types of funding commonly offered by these nonbank lenders include the following:

Moving On After Your SBA Loan Is Declined

You’re a business owner, so you know the importance of stick-to-itiveness and resilience. While you might be denied for an SBA loan, that doesn’t mean you’ll hear a “no” every time. Find out what you can do to improve your standing in the eyes of lenders, and try again. 

Also, keep in mind SBA loans aren’t for everyone. Sometimes, other funding options, whether grants or alternative financing, could be a better fit depending on your circumstances. Stay open to the possibilities and keep persevering.

Erin Ryan Staff Writer and Editor at Fast Capital 360
Erin has more than 15 years’ experience writing, proofreading and editing web content, technical documentation, instructional materials, marketing copy, editorials and creative content. In her role at Fast Capital 360, Erin covers topics of interest to small business owners, including sales, marketing, business management and financing.
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