Loan options for when you're rejected by the SBA

Get Rejected for an SBA Loan? Here Are Your Options

Get rejected for an SBA loan? Don’t stress, they’re hard to come by because of the low interest rates and good repayment terms. Not to mention SBA loans are desirable for lenders because they only take on part of the risk (as the government is also investing in the loan) when compared to traditional small business loans where the lender takes full risk. 

If you’ve been rejected because of your credit score, time in business, or because you have a bad debt-to-income ratio, we’ve got you covered. Below, we’ll cover ways to help get the decision overturned, and alternatives to the SBA loans so you can get the funding you need. But first, let’s look at the different reasons why you may have been rejected:

  • You still have other options
  • Debt-to-income ratio
  • Collateral
  • Credit score
  • Industry
  • Application issues
  • Time in business
  • Bankruptcy

You Haven’t Exhausted Other Options

The reason for rejection

The SBA shares that if you haven’t been declined for financing from non-state, federal, or local government options, you can be declined for an SBA loan.

Your options

The first step to get the “non-exhausted funding options” reason for rejection overturned is to apply for a small business loan with a large bank, an alternative lender like us, and another form of non-government based funding. 

When applying, make sure to be organized and have all of your paperwork. If the funding does not come through, you’ll want to be able to show that you tried your best when you reapply for an SBA loan. 

A Bad Debt-to-Income Ratio

The reason for rejection

Although a lender has a lower risk with the Small Business Administration covering part of the loan, they will still lose out if you default. Your debt-to-income ratio is one aspect of risk evaluation in that it shows how much money you have coming in each month to cover the loan repayment. 

A good debt-to-income ratio is 35% or less according to Investopedia and Experian. It can be calculated using the formula below.

Total Monthly Debt ÷ Total Gross Monthly Income x 100 = Debt-to-Income Ratio

Seasonal businesses like gift shops, gardening companies, and landscape companies will have changing debt-to-income ratios that can make getting an SBA loan challenging. The same challenge applies to companies with large overhead costs like a manufacturer that sells to wholesalers if they sell with tight margins.

Your options

The first option is to try using your personal credit score or personal debt-to-income ratio to help lower the risk levels. If your current personal debt-to-income ratio is poor, look for fast ways to lower monthly payments.

If you’ve been good about making your mortgage payments on time, see if you can recast your mortgage. Recasting is a process where you make a large deposit (normally between $5,000 and $10,000) and pay a fee to the bank and, in exchange, you can now make payments on the current amount owed vs. the total amount borrowed.

This could lower a $2,000 monthly payment to a $1,200 one depending on how much of your loan has been paid off. Another option is to apply for a short-term loan as there is less risk for the lender due to the shorter payback period and the fact you still have income coming in.

Collateral

The reason for rejection

If your financing is over $50,000 and it is not an international trade loan, you will likely need to put collateral down to get approved for an SBA loan. If your business is newer, doesn’t have equipment or machinery, or you don’t have the assets to put up as collateral, this can cause a rejection.

Your options

Personal assets can be used in place of corporate assets if you’re willing to risk your home, your savings, or the assets you put down. These assets are how the lender can recoup their losses if you default on the loan. Another option could be getting investors.

If your business is thriving, like a retail store looking to expand its footprint, investors may see the opportunity and give you the funds in exchange for equity in your business. Your success will lead to them growing, and they may have a network of experienced professionals to help you with accounting, how to manage multiple locations, and other needs as your business grows.

Credit Score

The reason for rejection

Having a low business credit score[2]  can make a lender nervous that you have too much debt and are less likely to be able to make monthly payments. This can apply to both business and personal credit scores. 

Your options

The first option is to begin paying down debts or reducing the amount of creditors you owe money to. Next, you want to establish confidence builders for the lender, which show them you do have the money coming in to make payments. This could be contracts you’re shortlisted for, letters of intent or memorandums of understanding with companies that intend to use your services, and revenue forecasts for how the loan will produce more net income. If you still cannot get the SBA loan, try an industry-specific loan instead.

Lenders may have loan programs for agriculture businesses, medical practices, and more. The loan specialists from these financial institutions are likely to understand that different businesses are known for having lower credit scores at certain times, like real estate investment companies that have assets tied to property at the time of the loan application process. This is a great alternative to an SBA loan if you get rejected for a bad credit score.

Industry

The reason for rejection

Certain industries like gambling, lending, non-profits, and other specific types of businesses are not able to get SBA loans. Some like real estate investors will have additional restrictions to keep in mind, like needing to live in the property as a primary residence for a specific amount of time. Also, keep in mind that these industries and the rules for getting SBA loans can change at any moment. 

Your options

When traditional and alternative lenders won’t provide an SBA loan or standard small business loan, go for equity funding. You can try using the database online, networking at local commerce meetups, or reaching out to your accountant to see if they have clients looking to expand their investing portfolio.

If you have a good idea or an opportunity to grow, there is bound to be someone else that believes in it too. With equity investors, you will need to give up part ownership of your business, but they may be open to a buyback provision. It will depend on what the terms are, whether the investor is focused on the short term or the long term, and how good the offer is. 

Application issues

The reason for rejection

Missing information, documents, or errors with the application are some of the most common reasons someone gets declined for an SBA Loan. It is vital to make sure everything is accurate and displayed in an easy-to-see format that meets the specific lender’s requirements. After all, they don’t want to invest their money into a business that isn’t organized or doesn’t pay attention to the details.

Your options

The best option here is to apply again, but this time, come better prepared. There are three easy ways to do this:

  • Hire a consultant, a peer located near you who got funding, or your CPA to go through the requirements and organize all of your documents. They may have ideas to make your application stronger by presenting net and gross profits or assets in a different way.
  • See if the lender or if your local chamber of commerce offers workshops where they share how to apply for loans and other financial training. Some lenders offer these as well, so visit their websites or write to customer support and ask.
  • Create a checklist with everything required. Organize all of the documents and include a table of contents. You could also add tabs on the sections to make it easier for the lender to review.

    Pro-tip: Go through your checklist twice: once on the day you organize your documents and then again the day after to make sure your application is all set.

Time in business

The reason for rejection

You can get rejected for SBA loans because you have not been in business long enough to have a history of revenue. Without an established history, the lender doesn’t have any reference to feel confident that you’ll be able to pay the loan back.

Your options

Start-up loans are one of the best alternatives to SBA loans when you get rejected for not having been in business long enough. They’re designed for entrepreneurs, allowing you to get the funding to make your vision a reality. You may have higher interest rates and lower amounts you can borrow, but it should be enough to get you off the ground.

If you have good credit, try taking a line of credit or a business credit card in addition to the loan to have more funding. Short-term loans may also be an option here.

Bankruptcy

The reason for rejection

Bankruptcy can lead to an SBA loan rejection because of the impact it has on your credit score or the reason why your business went under. If you can determine what the exact reason is, then you can find a solution.

Your options

If you got rejected for poor credit, work with a credit repair company to overcome the impact of the bankruptcy on your score. If it was because the business went under, work on your business plan and show what you will do differently with this new venture and how it will succeed, and have actionable steps written out to show why it is a good investment for the lender to fund.

If you still cannot get a loan, try a non-traditional route. Friends and family may be interested in investing in your new company. If you have a 401(K), you could draw from that account as well (but there may be tax and other financial issues). A third option is a cash-out refinancing loan on your home. If your business fails, you will lose these assets, so make sure you feel confident enough in the business before risking it all.

If you got rejected for an SBA loan, don’t stress. It has happened to many business leaders across the country. There are always ways to try again or you can obtain alternative financing.

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