By Rachel Keohan: A Small Business Administration loan (SBA loan) gives small business owners access to up to five million dollars to cover capital and expenses. For many, this funding option is a game-changer when it comes to getting (and keeping) a business up and running, and there are various categories (7(a), 504, and microloans) designed for different business types.
However, it’s not always so easy to receive one of these loans, as the qualification requirements are quite numerous and restrictive. In fact, some big banks only have a 25% approval rate. Cash flow is key for success, and without it, businesses have an uphill climb — 30% of small businesses shutter in their second year.
To increase your business’ chances of survival, learning why your business loan application was denied is critical. While some reasons are clear-cut, others take a bit more time and patience to reveal. If you received a rejection, fear not: here are some steps that may help you get the funding you need.
1. Practice Patience (and Hold Onto Your Financial Records)
One of the biggest issues business owners encounter during the loan application process is a lack of financial documentation over a significant period of time. Typically, you should have a minimum of three months, but to up your odds, experts recommend more than that — up to two years if possible. Above all, you’re trying to prove that your business is a safe bet, bringing in consistent cash.
2. Increase Your Credit Score
While specific requirements depend on the lender, if your credit score is low (under 650), you have a history of bad credit, or you’ve recently declared bankruptcy, you may not qualify for a small business loan. And though it may be tempting to “bootstrap” by depending solely on your own money and credit to launch your business, it can actually be detrimental to your chances of securing funding down the road by increasing your debt-to-income ratio — a factor that many lenders consider when making funding decisions.
There are several strategies for increasing your credit score, but the ones with the most impact include paying bills on time, keeping low balances on your card(s), and maintaining a healthy mix of loan and credit accounts.
3. Prove Your Capacity for Repayment
Showing a lender that you’re capable of repaying the amount you borrow is a critical part of the SBA loan application and approval process. Some red flags that may lead to a rejection include loans taken out elsewhere, a lack of significant business or personal collateral, and an insufficient amount of business revenue or capital to handle the balance of the loan. If possible, it helps to have some cash saved in the bank to prove your case, but as mentioned earlier, documentation of consistent and positive financial standing helps as well.
4. Evaluate Your Industry
A less common problem some business owners face is that their industry is one that lenders consider to be more risky than others — like used car dealerships, casinos, restaurants, consumer and marketing cooperatives, nonprofits, and racetracks. If your business falls into one of these categories, it may be worth looking into alternative funding sources (outlined below).
5. Reapply
You’re eligible to reapply for an SBA loan 90 days after you receive a rejection. Of course, you’ll want to make sure that you’ve taken care of the issue(s) that caused your application to be rejected, which shouldn’t be too difficult since federal law states that you’re entitled to a written explanation.
Examples of action items include boosting your credit score (personal or business) and making sure that your company’s financials are the best they can be. As mentioned above, if lack of time in business or insufficient documentation is the issue, sometimes simply waiting until you have a more solid track record is your best plan.
6. Consider Small Business Loan Alternatives
It’s important to note that a traditional SBA loan isn’t the end-all, be-all of financing options. There are quite a few alternatives, including a home equity investment. This is a great choice for small business owners who either don’t fit the criteria for loan approval or experienced rejection by a traditional lender.
Though standard loans often have fairly low interest rates, the downside is that the timeline for funding is quite slow — up to three months — and the process frequently requires both a hard credit pull and site inspection. If speed and cash flow are priorities, a home equity investment from a company like Hometap can get you the money you need in as little as three weeks with no monthly payments and zero interest. You can even put the funds toward anything you’d like if you go this route, whereas an SBA loan typically places some restrictions on use, limiting it to renovations or the purchase of equipment or furniture.
You can access your equity through a home equity loan as well, but if self-employed without a standard W2, this hinders your chances for approval.
It’s important to note that if you need a significant amount of capital, a home equity investment may not be the best fit, as most investors have a maximum funding amount of $600,000. However, if you value quick access to cash, no interest or monthly payments, and the freedom to use the money for whatever you like, research your options and see if a home equity investment is a good fit.
