Small Business Administration (SBA) loans are a great way to boost your small business, especially considering the lowinterest rates and long repayment periods. However, getting an SBA loan is tough, especially for newly established companies and startups. There are numerous requirements you and your company have to fulfill to qualify.
Generally, the approval rate is around 25%.If you get rejected, you should quickly devise a plan on what to do next. You can either opt to try again or explore alternatives. In this article, we’ll investigate both options.
Determine the Reasons
You filed an application for an SBA loan, but you were rejected. When this happens, you should investigate why that was the case. This will put you in a stronger position, whether you opt to try again or find another source of financing.
Since you’re dealing with the SBA and the lender, the rejection can come from either side. It is important to note here that, regardless of who rejected your submission, you have the right to get a letter with an explanation.
In case you’re dealing with a major SBA lender, it is most likely that you will get the rejection letter from them. Major or Preferred Lenders are authorized to approve and reject SBA loans. They are also authorized to send rejection letters.
On the other hand, if you’ve submitted the application with a smaller lender, chances are that you will get the letter straight from the SBA. When it comes to smaller lenders, the SBA plays a more prominent role in the process.
Most Likely Reasons
There are numerous reasons why the SBA or lenders may reject a company’s application. Let’s investigate the most common of them.
New Company
Oftentimes, the SBA or the lender requires the company to have at least a few years in business or be helmed by an experienced person if it is a new company. If you’ve just started a business without much prior experience and are already applying for an SBA loan, you might get a rejection letter.
Wrong Industry
Companies in certain industries can have a particularly hard time getting the loan. This is especially true for companies in excluded industries. The list includes, but is not limited to, companies that do lobbying, cannabis-related companies, some medical companies, and others.
Poor Personal Credit Score
You might also get a rejection letter if you have a low personal credit score. Many banks have the minimum set at 600. This is pretty high and somewhat hard to achieve.
Insufficient Collateral
As a result of the global financial crisis, many once-successful companies have failed seemingly overnight. For this reason, banks have become very risk-averse in recent years. They are looking for applicants that can guarantee with collateral that they will return the money regardless of what happens with the company.
Make Your Application Better and Resubmit
In a nutshell, getting an SBA loan is a numbers game. Some lenders might insist on the credit score while others might require valuable collaterals. These requirements make the outcome of the process pretty predictable. In any case, you can always try to up your game and apply again.
Before you apply anew, you should know that lenders use the E-Tran system to check your credit. Each pull is active for a period of 90 days. So if your company needs funding fast, you might be better off exploring alternative options.
There are also situations in which it is futile to apply again. This might be the case if you’re in an industry lenders are not willing to finance. However, if you’ve decided that it’s worth a shot to apply again, here are some steps you can take to increase your chances of success.
Get Your Company’s Finances in Shape
Since lenders are highly unlikely to lend money to a business that can’t pay back, your best bet is to get your finances in shape while you’re waiting to reapply.
See what you can do to boost revenues and cut costs. Also, see how you can pay any existing debts. Do whatever it takes to improve your company’s DSCR (debt service coverage ratio), as this will increase your chances when you apply again.
Boost the Credit Score
A high credit score is extremely important when applying for SBA loans. The higher it is, the better. This goes for both your personal and your business credit score.
In terms of your personal score, you should aim to get it over 600. If you manage to get it over 700, you’ll have even better chances of succeeding in the next round. The SBA evaluates the credit score of small businesses, as well. 300 points is the maximum, while the SBA accepts nothing under 140 points. Banks may have their own required minimums, and they’re always higher.
Give It Some Time
Sometimes, waiting for six or even twelve months before submitting a new application is the best move. Established businesses get around 65% of all SBA loans, while new businesses get only 35%.
Let your company grow and prove it can survive and thrive on the market.Prove that it’s capable of servicing its debts in a timely and proper manner. During the period, do all in your power to boost the profits and revenues and cut down the costs. Also, make sure to pay off any existing debts.
Alternatives
In case you’re not willing to wait or need money fast, you can explore other options. Here’s a brief run-down of the most common alternatives.
You can try applying for a business microloan. They are under $50,000 but are almost as hard to get as their standard SBA loan counterparts. If that fails, try obtaining a business credit card. In some cases, business credit cards can go over $50,000. However, you will need a good credit score for both options.
You can also try getting a hard money loan. On the upside, it is easier to obtain. On the downside, interest rates are significantly higher and you need to guarantee with real estate or other assets. Hard money lenders will usually finance only up to 60% or 70% of a project, so you’ll need to secure additional funding.
Invoice financing is another option you can give a shot. You can exchange unpaid invoices for cash. If you fail to pay, the lender keeps the invoice as collateral. Invoice financing is relatively easy to obtain and interest rates are not that high. Have in mind, though, that only B2B companies can get invoice financing.
Merchant cash advances (MCA) are also a viable alternative. The good news is that the bar is generally set lower, so you don’t necessarily need a good credit score or any of the other requirements you would have to meet to get an SBA loan. However, keep in mind that repayment periods are drastically shorter and interest rates are higher. While standard loans can have payment periods of 25 years, for MCAs they usually don’t exceed five years.
Final Words
While receiving a letter of rejection can be hard, being prepared to act fast is your best solution. Before you act, however, you should examine your company’s position and needs carefully and see if it’s worth applying again or not.
If you decide to try again, taking decisive steps to improve your application is the way to go. If you need money fast, you can try with alternative financing sources, such as microloans, hard money loans, or merchant cash advances.
