Five Reasons You Might Not Qualify for an SBA Loan
In the recent past, small business owners have demonstrated their interest in loans from the U.S. Small Business Administration (SBA). The loans are attractive because they offer a range of loan sizes, long repayment schedules, and low-interest rates. While alternative business lenders charge as high as 80% APR, SBA loans have around 70% APR. However, this depends on the amount you are looking to borrow and for how long.
It is important to note that the SBA does not give loans. The SBA guarantees businesses for loans given by other lenders. In general, the loans are often called SBA-backed loans. Even as the SBA loans seem the perfect option for business owners, it can be difficult to get approval. Lenders reject applications by many businesses that want these loans for one reason or another. The following are the five main reasons why banks reject SBA loan applicants.
You Are a Startup
Unfortunately, most banks are hesitant not to issue SBA loans to startup businesses in the US. The SBA requires a business to have a couple years in operations. They may have an exception where they lend to startups whose owners have experience in the industry. Generally, the lenders will reject your loan application through the SBA if you fall in the category of startups.
Solution: Borrow from other lenders who give loans to startups
Although your SBA loan application may be rejected, you do have options. For instance, you can borrow from nonprofit lenders who provide loans to new businesses. However, you may not be able to borrow too much money from such lenders. Some lend a maximum of $30,000.
You Have a Low Credit Score
It is a basic requirement to have a strong credit score for lenders to give you an SBA loan unconditionally. For most banks, most banks require a score of at least 600. Therefore, if you fall just short or far short of that, some lenders will reject you for an SBA loan. Nonetheless, you may have better luck with other lenders who care less about credit scores.
Solution: Seek a lender that does not check credit scores or requires only decent credit
Some banks do not base their lending on the credit score. Instead, they have a more holistic evaluation process to ensure that the applicant will be capable of repaying the loan. You can seek a loan from lenders such as Kabbage or OnDeck. These are examples of lenders who approve borrowers with a credit score of 550 or less. On the other hand, you can try Fundbox or Behalf. These lenders do not check the credit scores at all.
You Do Not Have Enough Collateral
Banks are risk averse and want to protect themselves in the event that a borrower cannot pay back a loan. Even as the SBA backs up to 75% of the loan, the bank will still be on the hook for the other 25%. The collateral that a small business owner will give for a loan is split between the SBA and the bank. If you cannot give enough collateral, there is a good chance that the bank will reject your loan application.
Solution: opt for a lender that does not require collateral
The good news is that there are short-term lenders who do not require a specific amount of collateral for a loan. For small amounts, some lenders may not require any collateral. It is okay if you do not have enough collateral for the loan.
You do not want to personally guarantee the loan
When you personally guarantee a loan, you are responsible for paying the loan back. This implies that you will repay the loan whether the business does well or closes down. If you do not pay the loan, the personal guarantee allows the lender to sell off the asset(s) given as collateral. Notably, banks will require personal guarantees for SBA loans. If you do not want to personally guarantee an SBA loan, the banks will reject your loan application.
Solution: look for a lender that do not require personal guarantees
Sort out for the loan you want form lenders who do not require a personal guarantee. A business owner may check from lenders such as PayPal Working Capital, Kabbage, Fundbox, and Behalf.
You are operating in an excluded industry
You might be a perfect applicant with a high credit score, several years in business, and enough collateral. However, it may be surprising and disappointing to have a bank reject your SBA loan application. This happens if you are in an industry that is ineligible for SBA loans. Excluded businesses include life insurance companies, lobbying organizations, certain types of franchises, certain types of health businesses, and more.
Solution: Choose a lender that do not have strict industry exclusions
Today, more loan options that do not base their lending on specific industries are available.
At Mount Bonnell Advisors, we encourage business owners to learn about all available loan options. Moreover, they should choose the best and one that is open to them.
