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Loans backed by the U.S. Small Business Administration are an attractive way to finance business growth because they have low rates, high borrowing amounts and long repayment terms.
Here’s the catch: SBA loan requirements can be tough to meet, making it difficult for some business owners to qualify. Even if your business generates strong revenue and you have a sound business plan, you still may be denied financing.
Here are five reasons you might not qualify for an SBA loan and steps to take to secure approval.
1. You have poor credit
The SBA doesn’t have a minimum credit score requirement, but most lenders want to see an excellent personal credit score (720 FICO and up). This shows the borrower has a long history of making on-time payments and maintains low balances on credit cards and other revolving credit. A bad credit score (below 630) likely disqualifies you.
Work on building your score before submitting an SBA loan application. Ways to build your credit fast include making frequent payments on accounts, asking creditors for higher credit limits and disputing errors on your credit reports.
If you’ve gone through a bankruptcy in the past, it may still be possible to get an SBA loan if you have a good explanation for it, says Rob Wilson, former chief executive of C7a, a nonbank lender based in Maine.
“As long as there is a plausible explanation for that, and people have acted responsibly and in good faith, then that’s not necessarily an impediment to being a borrower.”
2. You don’t have collateral or cash to put in the deal
Lenders often require you to secure an SBA loan with collateral, an asset or property, such as real estate or equipment, that the lender holds as security for the loan. A down payment is also typically required.
Pledging collateral and a down payment helps you develop a partnership with the lender as you take on your share of the risk.
If you need help raising cash for a down payment, see if you can cut unnecessary expenses out of both your business and personal budget, negotiate prices with vendors and sell unused equipment or inventory.
3. You have assets but don't want to use them
The SBA wants to know: If you can do it yourself, why are you coming to us?
The administration requires borrowers to use alternative financing resources, including cash or other liquid assets, before seeking an SBA loan. If the borrower’s personal and business resources are found to be excessive, those resources must be used “in lieu of part or all of the requested loan proceeds,” according to the SBA.
If you don’t want to put any cash or collateral in, unsecured business loans may be an option for you. Interest rates are higher, but no down payment is required and lenders cannot directly seize your assets if you fail to repay.
4. You've defaulted on a government loan
Have you defaulted on your government-guaranteed student loan payments or a Federal Housing Administration loan?
If so, don’t bother applying for an SBA loan.
Borrowers must be current on all government loans to qualify for SBA loans, and past defaulted government loans can disqualify borrowers, says Sean O’Malley, co-founder and board member of SmartBiz, an online lender providing SBA loans.
If you’ve just missed a couple of payments and you can pay the past-due amount, it shouldn’t count against your credit score or be entered as a default.
5. You have a criminal record
The SBA requires your business and all its principals to show “good character,” and a “statement of personal history” is required of each applicant so the SBA can make a decision about character and credit eligibility.
The SBA will ask you on this form if you’ve ever been charged with a crime, if you’ve been arrested in the last six months and whether the arrest was for something other than a minor vehicle violation.
An arrest doesn’t necessarily disqualify a small-business owner, but having a criminal record delays the application process, O’Malley says.
“Felonies take the longest to clear — many months in some cases — while minor misdemeanors can usually be resolved in a few weeks,” he adds. “However, multiple misdemeanors are more difficult, and multiple felonies will disqualify a borrower entirely.”