Why Your SBA Loan Was Denied & What To Do Next

An SBA loan application that is incomplete will be denied. An application that isn’t complete could be missing personal or business information or something as simple as a signature or date.

Your loan application will also require certain documentation, such as prior years’ tax returns, balance sheets, and financial projections. Failure to submit any of the required documentation will result in a denial of your application.

Credit score requirements for SBA loans vary by factors including borrowing amount, loan type, and lender policies. In general, it’s recommended to have a personal credit score of 680 or higher to qualify for an SBA loan.

If your personal credit score doesn’t meet the lender’s requirements, your loan will be denied. Applicants that have no credit may also be denied.

Even if you meet personal credit score requirements, negative items in your credit report may result in an SBA loan denial. While negative items like an old hospital bill that was sent to collections or a single late payment may not necessarily disqualify you, there are a few red flags lenders look for, including:

• Recent bankruptcies
• Recent foreclosures
• Past defaults on government loans, including student loans

Lenders may check your business credit score for some SBA loan programs, like the 7(a) loan. The Small Business Scoring Service (SBSS) is used to determine your business credit score. The SBA generally likes to see a minimum score of 140 on a scale of 0 to 300. However, your lender may have higher business credit score requirements.

One important requirement for receiving an SBA loan is to show the lender that your business is able to repay the loan. If your revenue is low or inconsistent, you may be unable to qualify for an SBA loan.

Even if you have plenty of revenue, your SBA application may be rejected if you have too much debt.

Lenders use the debt-to-income ratio to determine if you can comfortably afford your loan payments. DTI is calculated by dividing your total monthly debt by your total monthly income. The resulting number can be converted into a percentage to show your DTI.

While lender requirements vary, most look for a DTI that’s 43% or lower — and the lower your DTI, the better your odds of qualifying for a loan.

While it’s possible for new businesses to qualify for SBA loans, there may be some challenges along the way. Your new business may be denied if you try to qualify for a high borrowing amount or certain types of funding, like the CDC/504 loan.

Your business may also be denied if you don’t provide all required documentation, such as financial projections. Your business may also be denied if the lender reviews your business plan and determines your business is too much of a risk.

Depending on the type of loan and borrowing amount, you may be required to pledge business and/or personal assets as collateral for your SBA loan.

It should be noted that a lack of sufficient collateral alone won’t get your application denied by the SBA, provided you meet all other requirements. However, if your application and credit profile aren’t strong, a lack of collateral can contribute to the denial of your application.

The SBA has a list of industries that are ineligible for funding. This includes:

• Gambling businesses
• Businesses engaged in illegal activities
• Lenders
• Investors
• Businesses engaged in speculation
• Multi-level sales businesses
• Religious organizations
• Nonprofits
• Government-owned businesses

Business owners that are currently incarcerated, on probation, or on parole are also ineligible to receive an SBA loan.

The SBA and your intermediary lender will have other requirements that you must meet to receive a loan, including:

• Meeting the size standards set by the SBA
• Operating as a for-profit business
• Engaging in (or planning to engage in) business within the United States or U.S. territories

Failure to meet any of these requirements will result in a denial of your loan application.

Talking to your lender may give you insight as to why your application was denied and how you can avoid this in the future. You can also discuss other financial products available through your lender or ask for a referral for other sources of business funding.

Before you apply for another loan, it’s important to know where your credit stands. Checking your personal credit score can help you determine if you’ll meet lender requirements for the type of loan you’re applying for. Don’t forget to check your business credit score, too, as some lenders also use this to qualify borrowers.

You should also look at your credit report to see what’s affecting your score so you can start working on improving your credit.

If your credit score is preventing you from getting an SBA loan, take steps to improve your score. This includes:

• Reviewing your credit report and disputing errors with the credit bureaus
• Making all payments on time as scheduled
• Paying down debt to lower your credit utilization
• Catching up on late payments
• Limiting credit inquiries

Avoid companies that promise to lower your credit score for a fee. These businesses typically do a combination of the steps above, all of which you can do on your own at no cost.

A high DTI can result in a loan application denial. Before you apply for another loan, lower your DTI by:

• Paying off or paying down debt
• Consolidating debt
• Refinancing high-interest debt
• Increasing your income by offering a new product or service

A simple mistake or omission can disqualify you from receiving an SBA loan. Before you apply again, make sure you understand the SBA loan application process. Know the SBA loan requirements and ensure you meet them all before filling out an application.

Finally, make sure your documentation is in order. If you aren’t already using accounting software, this is a great way to easily keep up with your financial documents. Update your business plan, run reports, gather your tax returns, and get organized before applying for another loan.