SBA loans are among the best financing options for small business owners. They come with low interest rates, long repayment terms, and manageable monthly payments. SBA loans are designed to offer a path to affordable financing when an entrepreneur’s other options haven’t panned out.
The problem for small business owners is that SBA loans are actually highly selective—lenders end up denying hundreds of applications. At large banks, the approval rate for business loans, including SBA loans, is only around 25%. At small banks, the approval rate is higher—sitting around 49%—but more than half of borrowers still get turned away. So if you have been denied for an SBA loan, you’re certainly not alone.
Receiving that denial letter from the lender can sting, but you can quickly get back on track. The first step is to find out why you were denied for an SBA loan and use that to your advantage as you continue your search for business financing. Learn how to do that, plus whether your best bet is to reapply for SBA financing or try other alternatives.
The first step you should take when you’re denied for an SBA loan is to find out why. Understanding why the lender couldn’t extend you a loan puts you in a stronger position, whether you choose to reapply for an SBA loan later or apply for other types of financing.
If your application for an SBA loan gets denied, you’re legally entitled to a written letter of explanation. According to the federal law that regulates SBA business loans:
“Applicants receive notice of approval or denial by the Lender, CDC, Intermediary, or SBA, as appropriate. Notice of denial will include the reasons. If a loan is approved, an Authorization will be issued.”
Depending on which SBA loan program you applied for and which type of lender you worked with, your denial letter will come either from the lender or from the SBA directly.
If you work with a leading SBA lender, like Wells Fargo or Chase, the lender will be your main point of contact for everything related to approval or denial. This is because most large banks are part of the SBA’s Preferred Lender Program (PLP). Preferred Lenders have the authority to process, underwrite, approve, or deny SBA loans. If your lender is not a Preferred Lender, the SBA will take a much more active role in underwriting your application and will likely be the one to send your denial letter.
Maria San Luis, an SBA Relationship Manager at Fundera, says that denial letters are typically pretty vague, whether coming from the lender or the SBA. According to San Luis, this can be frustrating for the applicant:
“Different lenders have different denial procedures, but in most cases, you won’t see a very specific reason for denial. It will be something vague like ‘application doesn’t meet SBA credit standards.’ This doesn’t give too much information for the applicant.
However, working with a platform like Fundera can help. Our loan specialists work closely with SBA lenders and have a good understanding of why an applicant got declined. We can help them figure out what happened and next steps to take.”
A loan specialist can also help ensure that your SBA loan application doesn’t get delayed or denied for completely avoidable reasons, such as missing documentation.
Every SBA lender has their own eligibility standards for SBA loans and their own underwriting process. That said, most lenders are looking for the “5 Cs of lending.” As a result, most SBA loan applications get denied for one of those same five reasons:
Although the reasons for denial can be vague, the best place to start is by hearing straight from the lender or the SBA why they couldn’t work with you. If possible, have an honest conversation with the lender or the SBA about what went wrong, so you can plan your next move.
→Too Long; Didn’t Read (TL;DR): If you’re denied for an SBA loan, you will receive a letter of explanation from the SBA or from the lender. Have an honest conversation with them about why you were denied, so you can plan your next move.
In many ways, qualifying for an SBA loan is a numbers game. For example, lenders might have specific credit score minimums, or they might require a specific amount of collateral. Although you might view these rigid requirements as a bad thing, they also make loans predictable. There are clear ways to strengthen your application and reapply.
Reapplying isn’t a good option for all business owners, however. Under SBA guidelines, says Fundera’s San Luis, a borrower has to wait 90 days after receiving a notice of denial to reapply for an SBA loan.
The reason is that SBA lenders check credit using a system called E-Tran. The E-Tran credit pull stays active for 90 days, after which it can change to reflect changes in your application. If you need funding more quickly than 90 days, finding an alternative to an SBA loan is better than reapplying.
Likewise, there are some situations where reapplying won’t help. For example, businesses in certain industries have a tougher time obtaining financing. Lenders have strict policies against lending to certain industries. If a lender declined you because of your industry, then SBA funding just might not be available to you, and you’d be better off seeking an alternative.
If reapplying for an SBA loan makes sense for your company, there are specific steps you can take to strengthen your loan application the second time around. Here are some ways to switch an SBA loan denial into an approval:
Credit is the number one factor that affects your chances of getting approved for an SBA loan. Lenders assess the personal credit of the owner and the business credit of the company.
Personal credit scores, which you might already be familiar with, follow a 300 to 850 range. The higher the score is, the better your chances at approval, but the cutoff for SBA loans is typically around a 620. And most lenders want to see a score much better than that, in the 700+ range.
Business credit scores also impact your application. The business credit score that the SBA uses is called the Small Business Scoring Service (SBSS). This follows a 0 to 300 range, and the higher the score the better. The SBA uses this score as a prescreening tool for their most popular loan program, the SBA 7(a) loan. The SBA’s cutoff is 140, but banks typically have their own cutoffs, which are higher.
Credit scores work in tandem with the rest of your application. For instance, if you have a well-established business with strong revenues and lots to offer in the way of collateral, then you might be able to get approved with an average credit score. But if you have a new business or are still working to increase revenues, then stellar credit scores are a necessity.
The best way to build credit is simply by paying bills on time, both on the personal side and to business suppliers and vendors. Beyond that, lowering credit utilization—how much credit you use relative to what’s available—can quickly amp up your credit score, as well. So if possible, pay down excess debt such as credit card debt, that could be dragging your credit score down. These strategies can help you increase your score by several points in less than one month. That difference could be the key to getting an SBA loan.
Along with credit, your business’s finances are key to getting approved for an SBA loan. The SBA and lenders want to make sure that the borrower will be able to pay the loan back, on time and in full. To make that determination, they look to your business’s finances—your revenue, profits, and existing debt.
This is a case-by-case evaluation, just like credit. Some lenders require businesses to be profitable to qualify for an SBA loan. Others don’t require profitability but do want to see an upward revenue trend.
There’s a formula called debt service coverage ratio (DSCR) which lenders use to figure out your capacity to pay back the SBA loan. Your DSCR tells whether your business is generating enough income to pay off existing debts and obligations. Your DSCR should ideally be greater than one because this indicates positive cash flow.
To improve your business’s financial standing, you can brainstorm ways to increase revenues, reduce expenses, and pay down existing debt. Small tweaks can pay off in a big way. For example, if you have a retail business and can increase your profit margin by just a few percentage points, that can tip your DSCR in the right direction. Similarly, cutting back on non-essential expenses can boost profits and help you qualify for an SBA loan.
While you’re working on improving your business’s revenues and expenses, it also helps to evaluate your asset position. For instance, if you acquire new equipment or inventory, those are assets that you can leverage as collateral for an SBA loan.
Another way to strengthen your SBA loan application is simply by waiting. Technically, SBA loans are open to new businesses, but startups also face the largest share of denials. In any given year, more than 65% of recipients of SBA 7(a) loans are established businesses (over two years old). Only about 35% of recipients are new businesses.
Startups often get denied for SBA loans because they haven’t been around long enough to prove that they can pay the loan back on time. Startups are still “figuring out” how to generate profits and establish business credit. Lenders and the SBA prefer to work with more established businesses that have shown a record of financial success.
Waiting just six months or a year can help turn an SBA loan denial into an approval. Make sure to spend those extra months increasing revenues, building credit, and implementing your business plan.
→TL;DR: Reapplying for an SBA loan can be a good option if you’re not in urgent need of cash. You have to wait at least 90 days. Use the time as an opportunity to improve credit, increase revenues, or otherwise strengthen your application.
As a busy entrepreneur with a growing business, you might not be willing to wait 90 days to reapply for an SBA loan, or you might not want to go through the rigorous application process again.
The SBA loan process can take hours of paperwork, and when you reapply, you have to submit updated documentation, such as the latest bank account statements and financial statements.
Fortunately, there are faster, easier financing options on the table. The best alternatives for your company depend on which SBA program you applied for in the first place. Broken down by type of loan, here are some good alternatives to SBA financing:
A multitude of online lenders provide business loans, offering up to as much as $500,000 in capital. Many business owners use these loans as a source of working capital, making them a good substitute for SBA 7(a) loans.
SBA 7(a) loans are general purpose business loans that you can use as working capital for your company. The bar for qualifying for a 7(a) loan is really high, and that’s where an online lender can help. Many online lenders work with borrowers who have FICO scores as low as 500. They also can work with businesses that have just a few months of operating history.
The downside is that online lenders have shorter periods of repayment compared to SBA loans and charge higher interest rates. The repayment term for 7(a) loans ranges between five to 25 years, whereas online lenders typically offer six-month to five-year terms. Shorter repayment terms means larger monthly payments, which can put stress on your cash flow.
Online loans also have interest rates—sometimes 10 times higher than SBA loans! But since you’re holding onto the loan for a shorter time, you’re also paying less in total interest over the life of the loan. The best way to evaluate cost is to use a business loan calculator, which will show you the APR of your loan and the estimated installment payments.
B2B businesses that were denied for an SBA 7(a) loan can also try invoice financing as an alternative. Invoice financing allows your business to access working capital by trading in unpaid invoices for cash.
If you have invoices that are due in 30 to 90 days, the lender will let you access that money now in exchange for a fee. The invoice acts as collateral on the loan, so the interest rates are usually pretty reasonable. Low credit and short time in business usually aren’t bars to qualifying.
Invoice financing can help you keep up with day-to-day expenses like buying inventory and supplies. The downside is that only B2B businesses are eligible, and even with low interest rates, the rates aren’t quite as low as SBA loan rates.
SBA 504 loans are a great way to finance the purchase of real estate, equipment, and other fixed assets. If were denied for an SBA loan, you can try other asset-based loans like hard money loans.
As with a 504 loan, real estate or equipment typically serve as the collateral for a hard money loan. But hard money lenders are much more open to working with newer businesses and business owners with lower credit.
The downside is that hard money lenders charge higher interest rates, more fees, and require an extensive down payment. The major selling point of SBA 504 loans is that they offer 90% financing (only a 10% down payment is required). In contrast, hard money lenders often finance only 60% to 70% of a project. But if you’re able to come to the table with a good share of your own resources, then consider applying for a hard money loan.
Some entrepreneurs need just a little bit of money to move the needle for their business. The SBA Microloan Program fits this need. Through this program, the SBA works with lending partners to get small loans—under $50,000—into the hands of business owners.
Although a smaller amount of capital is in play here, SBA microloans are still difficult to qualify for. If you were denied for an SBA microloan, business credit cards might be a good alternative.
Business credit cards often have credit limits going up to $50,000 or more. And they offer other perks, such as rewards points for purchases. Some cards even offer 0% APR for several months, which allows you to borrow interest free.
The highest credit limit cards and cards with the best rewards programs are reserved for business owners with the best credit. But even with decent credit, you can get a business credit card that offers rewards points, cash back, and other perks.
For instance, the Capital One Spark Classic for Business offers 1% cash back on all purchases and only requires a credit score of 580 or greater.
→TL;DR: If you were denied for an SBA loan, alternatives offer a faster application process and easier qualification requirements. Some alternatives to consider are online short-term loans, invoice financing, hard money loans, and business credit cards.
Getting denied for an SBA loan can feel like a huge setback for your business. But think of it as an opportunity to regroup and strengthen weak points in your business.
Here are some things to think through if you’re denied for an SBA loan:
Although getting denied for a loan can be discouraging, try to see this as an opportunity to improve your business. Eventually, whether through an SBA loan or another option, you’ll get the capital necessary to take your company to the next level.
Priyanka Prakash is a senior contributing writer at Fundera.
Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.