What to Do If You've Been Denied for an SBA Loan

A middle-aged man wearing glasses leans against a wall holding a cell phone as he looks out a window on a sunny day.

Last year alone the U.S. Small Business Administration (SBA) issued more than $30 billion in low-interest, flexible loans, fueling growth for millions of entrepreneurs and businesses.

Unfortunately, scores of business owners are also turned down by SBA-approved lenders every year. The reason is simple: With SBA loans, banks don’t take on the risk, the government does. As a result, the barrier to approval can be higher than with other loans.

If you count yourself among the ranks of those who have not made the cut, it’s important to recognize that a rebuff isn’t necessarily the end of the story.

In fact, should you choose to roll up your sleeves and do a bit of smart troubleshooting rather than simply giving up, you may be surprised by how quickly you can improve your odds of approval next time around. You may find your business buoyed by these powerful lending vehicles sooner than you expect.

To that end, here are 5 reasons your application might fall short—and what to do about it.

1. Your Business is Too New

Experience counts when it comes to getting an SBA loan. Banks want you to have at least a couple of years of operations under your belt. Startups typically require an experienced management team to qualify.

Resolution: If you’re nearing the two-year mark, try to hold off in reapplying until you meet the time in business qualification or consider a business line of credit. With an unsecured line of credit, there is no collateral required. A secured line of credit requires you to offer short-term assets, such as accounts receivable or inventory. Because the line of credit is backed by the business assets, limits tend to be higher than with an unsecured line of credit.

For startups, the management team matters as much as the product or service sold. If your business lacks the experienced team, seek to recruit one. Bring on board members, consultants, or mentors who enhance the pedigree of the enterprise. Be sure your business plan lays out your experience and that of the management team.

2. Not Enough "Skin in the Game"

In order to qualify for an SBA loan, you’ll need to have enough of your own money at stake. For two reasons: First, to demonstrate the degree to which you are personally invested in the enterprise. And, second, as an indicator that you've already explored all opportunities to invest personally in the business and are in legitimate need of outside help. SBA lenders typically require a down payment of approximately 10 percent.

Resolution: Amassing the requisite down payment can be tough. It is, however, necessary. Many business owners use a combination of funding sources. Just be sure to fully weigh the pros and of each available option. You can withdraw or borrow from a 401(K), for example—though doing so can result in early withdrawal penalties and interest if you borrow against it. A personal or business loan can be another option, but that too has costs associated with it. You can also use cash from your business or assets to cover the down payment—including property you’ve owned for longer than two years. Loans from family and friends also count.

3. Less-than-Stellar Credit History

The SBA lenders set a high credit score bar, taking into account both your personal and business ratings.

Resolution: If your credit score isn’t quite where you’d like it to be, there are steps you can take right now to improve it. Paying off debt is the quickest way. A big component of your creditworthiness hinges on the amount of credit you have compared to how much is utilized. The sooner you lower that ratio, the quicker your score improves.

Remember, credit scoring agencies make mistakes. That’s why it’s critical to check your credit reports for errors—even if there isn’t a glaring discrepancy—and immediately correct any you find.

4. Lack of Collateral

In order to benefit from low interest rates, you provide your bank with collateral—i.e., an asset with value.

Resolution: If you’re turned down because of a lack of collateral, talk to your lender about alternatives. There are various types of collateral the bank may accept—ranging from real estate and inventory to receivables and personal assets. If you don’t like the idea of potentially losing an asset, consider an unsecured business loan or line of credit that is underwritten based on the strength of your business.

5. Insufficient Cash Flow Management

Borrowers must show they can cover business expenses as well as repay the loan. Historical performance and cash flow projections are taken into consideration to determine how likely that is. Strong cash flow is typically a prerequisite for approval.

Resolution: If you are rejected because of cash flow, it is necessary to fix those issues before applying again. One effective way to accomplish this is to automate your processes. Cloud-based platforms, for example, enable you to automatically send invoices, engage in data-driven forecasting and manage cash. Not interested in a digital overhaul? Reduce your expenses and ensure your pricing is accurate to boost the bottom line.

Next Steps: It’s Worth the Effort

SBA loans are a low-cost avenue to nurture—and, hopefully, expand—a business. Don’t let the first roadblock you encounter end your journey. Gain experience, improve cash flow, increase your collateral—in short, do whatever you need to do to apply again with a stronger hand. Trust us, once you’re back on track and funded you’ll thank yourself for that past perseverance.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.