What to Do If Your SBA Loan Application is Denied

What to Do If Your SBA Loan Application is Denied
What to Do If Your SBA Loan Application is Denied
October 1, 2016

Sustaining a business would require a constant flow of cash. The US government backed Small Business Administration (SBA) loans are particularly attractive to small businesses for a number of reasons which include long repayment time and the fact that the loan comes in a range of sizes and has a low interest rate. Not everyone will qualify for this loan and below are the causes of rejection:

1. Startups will rarely get approval

Banks will be reluctant to issue SBA loans to startup companies. One of the criteria to consider for SBA loans is the number of years the business has been in operation. This is because most startup businesses fold up after a few years. A track record of your years of running the business is also a testament to your administrative prowess and the bank will be sure that they can get back their money in due time.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

You can circumvent this problem by seeking alternative lenders

Loan is probably the fastest means of raising capital as a startup. To grow your business in the early years, you may need to borrow from alternative sources to finance your business pending when you have a good number of years of operation tucked in your purse. Several investors as well as nonprofit organizations are willing to invest in small businesses.

Your cash flow can be leveraged upon for your borrowing

As a startup of only three months old, your chances of borrowing can be spiked if you have a good sales history. The lenders usually emphasize on the records of stable sales rather than the number of years in business. A lot of credit or debit card sales can get you a merchant cash advance from various providers.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

2. Low credit score is a huge obstacle

A strong credit score is a must to qualify for an SBA loan. Most banks will not hesitate to reject your application if you do not have at least a credit score of 600. Your best bet is to seek lenders that do not care much about credit score.

Short term loan lenders can provide you loan with low credit score

With a credit score of 550 or lower, short term loan providers will not mind giving you loan. There are also lenders like the PayPal Working Capital that does not check credit score at all. The latter will require you to present them with other criteria. A number of short term loan lenders give loan based on the number of unpaid invoices.

Read also: What You Never Knew about the Small Business Administration Loans

3. Collateral is required for SBA loan

Collateral is one of the strongholds that lending institutions demand from their borrowers. Since the economy witnessed a downturn, banks are becoming insistent on collateral before they can sign out a dime to their borrowers.

SBA backs up 75 percent of the loan

Irrespective of this point, banks are averse to dishing out SBA loans because they still have to account for the 25 percent not backed up by the government. Their apprehension stems from the thought of ‘what if the borrower does not pay back’.

Seek other lenders that do not require collateral

The collateral that is leveraged upon by the bank is split between the SBA and the bank. Therefore, your collateral should be able to cater for a large part of the loan. The good news is that there are short-term lenders that are not so keen on collateral for loans but the sad news is that they can place a lien on your business, meaning they can sell it off should you default.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • SBA loans are Small Business Administration loans backed by the US government.
  • The government accounts for 75% of the loan while the banks handle the remaining 25%.
  • SBA loans are competitive because of their low interest rates.
  • There are multiple reasons why the bank may not be willing to give out loans to small businesses.
  • Small businesses are classified under high risk ventures.
  • A credit score below 600 may lead to rejection of SBA loan application.
  • Banks often require collaterals and personal guarantors.
  • There are industries that are excluded from accessing SBA loans.
  • The incapacitation to SBA loans can be bypassed by using alternative funding.
  • Alternative loan houses would usually seek other forms or guarantee.

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