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• By Laura Drechsler
• Dec 6, 2024
• 10 mins read

Why SBA Loans Seem Hard to Get and Alternatives

SBA small business loans may seem hard to get, as lenders need borrowers to demonstrate a healthy cash flow to show that their business is operating efficiently, have a few years of business history to show experience, and maintain good business credit to prove that existing debts get paid. By checking these boxes, a business owner can build a lender’s confidence and show they’re a low-risk borrower.

There are common reasons why business owners get rejected for SBA loans even when they meet the criteria above. For example, if you have a brand-new business and aren’t cash flow positive yet, a traditional bank may see this as risky especially when you haven’t had time to build enough business credit.

If you were rejected for an SBA loan and not given a reason why, you’ll find five of the most common reasons for rejections below, as well as how to resolve these issues so you can apply again. On the other hand, if you don’t want to go through the SBA application process, we’ve also compiled alternative ways you can get the funding you need for your small business.

Reasons SBA Loans are Denied

1. You’re a new business or considered a start-up

Traditional lenders view new or startup businesses as “risky” since they don’t have a track record of success or positive cash flow just yet. So owning a brand-new company is one of the top reasons you might struggle to get an SBA loan.

Many SBA lenders require a business to be at least two years old before they’ll consider an approval, and lenders are more likely to approve a loan application when you can show consistent, positive cash flow over several years. Every small business owner must start somewhere, but being unable to show the bank any revenue history or stability makes it hard to qualify for an SBA business loan.

What’s the solution?

Traditional lenders like large banks focus heavily on business history when granting approvals, while alternative lenders may consider how the SBA loan will be used. Alternative lenders are more likely to factor in different decision criteria, like your business plan, current revenue, and personal credit history.

A good personal credit history shows fiscal responsibility, and having a positive and consistent revenue stream builds trust. With alternative lenders, both of these factors could help overcome traditional lending hurdles. And you can take advantage of less required paperwork and a shorter decision time.

As such, if you get rejected for an SBA loan because your business is too new, a small business loan from an alternative lender could be your next best option.

With an SBA loan, the Small Business Administration has additional rules lenders must enforce when it comes to financing. But these do not apply to alternative small business financing provided by direct lenders. Private lenders can create their own guidelines as they are solely responsible for funding the loan and taking on the liability.

2. You have inconsistent cash flow

SBA loan applications can get rejected for inconsistent cash flow, as this is a warning sign that the health and stability of your company could be at risk. Not having reliable cash flow signals to the lender that you may struggle to repay the loan at certain times, and because SBA loans are always in demand, a similar business with consistent cash flow is more likely to be approved.

If you don’t have cash on hand because it is a slow season, like a landscaping business in winter, you may get rejected for the SBA loan, given that this type of financing requires a down payment of up to 20% of the total loan amount.

What’s the solution?

If you got rejected for an SBA loan because of inconsistent cash flow, a retail business inventory loan is an option for retailers and short-term business loans are good options for non-retailers.

Retail business inventory financing is a great alternative for SBA loans for product manufacturers, retailers, distributors, wholesale traders, and seasonal businesses, because the lenders look at the seasonality trends of your business vs. current cash flow on hand. If approved, you can get fast funding to meet the immediate demands of your customers while stabilizing cash flow.

Meanwhile, short-term business loans make great alternatives to SBA loans for seasonal business operators that don’t need long repayment terms or high loan amounts. These financing options offer smaller loan amounts with short repayment terms, so you aren’t stuck with long-term debts as you’ll pay them off during or directly after your busy season.

3. You submit disorganized (or incomplete) business documentation

Applicants that submit incomplete documentation or disorganized paperwork may get rejected for SBA loans or find their application delayed.

No matter your lender, applying for an SBA loan involves specific required documents like a business plan, business tax returns, and background materials. Not having these in place may cause a rejection due to incomplete paperwork, and it makes your business look disorganized.

What’s the solution?

If you get rejected for an SBA loan because you missed important paperwork or did not submit documents, create a list of what the specific lender requires and double-check that you have everything you need.

Here’s a tip. If you’re submitting digital copies, be sure to clearly name each document you must submit. This will make items easier to locate. Meanwhile, for physical submissions, use tabs with labels. You can also put together a quick table of contents to keep things organized for your lender, regardless of your submission method.

Here is what to have at a minimum when applying for an SBA loan:

• SBA Form 1919
• Personal background and financial statement
• Business financial statement (including three years’ worth of year-end profit and loss statements and balance sheets, a reconciliation of net worth, etc.)
• Business certificate or license
• Loan application history (if any)
• Most recent income tax returns
• Resumes for each business owner

Bonus-tip: Lenders host online or in-person workshops throughout the year. These workshops explain what to prepare, how to apply, and pitfalls to avoid as they relate to the SBA loan application process. Attending a workshop can give you an outline of what that specific lender is looking for and could help you avoid getting declined for SBA loans due to missing paperwork or disorganization.

4. You have a low personal credit score

Banks will reject your application for an SBA loan if you have a low credit score because they are typically risk-averse. This applies to both business and personal credit scores. In addition to factors like a strong payment history with suppliers and a number of years in business, many lenders require borrowers to have a FICO score above 650.

If your credit score is low, lenders may conclude that you’ll have a hard time paying off your loan on top of your existing monthly obligations. There is no shortage of people looking for SBA loans, so if it is between you and a business owner with a higher credit score, they may get approved while you get rejected for the SBA loan.

What’s the solution?

To increase your chances of getting an SBA loan with a bad credit score, start by paying bills on time each month and watch the balances you carry. Also, keep in mind that applying for loans, lines of credit, and credit cards can cause short-term credit score fluctuations, so pause on these until your score improves.

You can also reduce some of your debts or monthly payments with creative strategies like recasting your mortgage. By making a lump-sum payment toward your principal balance, you can reduce your monthly payments going forward.

Other credit-building opportunities can include:

• Paying your bills in full before the due date so you don’t pay interest or miss a payment.
• Lowering account balances to keep lines of credit open and maintain a healthy credit utilization ratio.
• Avoiding opening new credit cards, as new accounts can drop your score initially.
• Not maxing out the accounts you do use, keeping your utilization low and preventing finance charges.
• Looking for missed payments or overdue balances on your credit reports and resolving these first. This may increase your score more quickly than unreported debts.

If you need the small business loan before you can rebuild your personal credit score, look for alternative lenders that have loans designed specifically for your situation. There are working capital loans for covering day-to-day operations, emergency business loans for situations that are out of your control, and industry-specific loans like healthcare financing that cater to business owners with unique needs.

5. You don’t have established business credit

Not having good business credit can cause an applicant to get rejected for an SBA loan, as it is a sign the business does not pay its debts. Because lenders make their money on the interest paid back each month, companies with lower business credit scores are higher risks for lenders.

If your business hasn’t established a credit history, it may be more difficult to prove its creditworthiness and qualify for an SBA loan. Then your personal credit comes into play. If your personal FICO is also on the lower side, you may not get approved for the SBA loan.

What’s the solution?

Building your business credit score can help you get approved for an SBA loan as you may be viewed as more creditworthy or financially responsible. To find your business credit score, go to the business credit bureaus including Dun & Bradstreet, Nav, and Equifax and obtain your report.

Note: Your business credit score can influence your company’s insurance premiums, lease agreements, and vendors’ terms, so building it now can reduce your future costs.

If you don’t have business credit but want to start building it, your first steps are to register as an LLC or other legal entity and establish a federal employer identification number (EIN) through the IRS. This number allows creditors to report your business credit history to the bureaus and will be used to calculate your score.

With an EIN, you can apply for a business credit card, which can help you start building your business credit score. Always pay your bills in full and on time to strengthen your payment history and avoid unnecessary late fees.

Similar to the solution for getting rejected for an SBA low due to low personal credit scores, industry-specific business loans remain good alternatives. If lenders have niche business loans, they are likely more familiar with your space and will take other factors into consideration outside of credit scores.

Getting a decline for an SBA loan reversed is easier when you know why your application got rejected, because you can then take steps to resolve the issue. In situations where you fixed the problem but still got declined for an SBA loan, try alternative lenders.

Here at QuickBridge, we work hard to provide small business owners like you with the funding you need to succeed — with an easy application, minimal paperwork, and faster loan decisions. Fill out an application today to start exploring your customized financing options.

Consult with your tax advisor or accountant for more information and to put together a strategy that’s tailored to your business situation.