Was Your SBA Disaster Loan Denied?

Further Clarification Needed for Your Documentation

As a new business owner with no prior experience in applying for funding, completing all the necessary paperwork for your loan application can be daunting. One common reason for SBA disaster loan denials is incomplete or insufficient documentation, requiring further clarification, or missing necessary forms.

The reality is that the SBA small business loan application process is lengthy and meticulous. Understandably, a new borrower may struggle to complete all the required paperwork accurately and comprehensively.

To provide you with an overview, most lenders and banks will request a business plan, at least three years' worth of business and personal tax returns, bank account statements, financial projections for your small business, and your personal and business credit reports.

In some instances, lenders may require additional documentation, such as legal documents, contracts, permits, licenses, patents, etc., to verify the legitimacy and credibility of your business.

If you have been denied and are reapplying, we recommend reviewing the requirements you previously submitted to ensure you haven't missed any crucial documents for your application. You can also contact the SBA office directly to inquire about the necessary documents and avoid another denial.

Unfavorable Credit History Impacts Your Application

Maintaining a solid personal and business credit history is necessary for small business owners. Lenders utilize this information to evaluate your eligibility for a small business loan and determine your creditworthiness.

According to the "Small Business Access to Capital Study" by the National Small Business Association, 20% of small business loan applications have been denied due to poor business credit.

A more concerning statistic from the Nav American Dream Gap Survey reveals that 45% of small business owners are unaware of their business credit score, and 72% do not know where to access this information. Additionally, 82% do not understand how to interpret their business credit score.

To better comprehend this, let's consider your personal credit history. It reflects your ability to meet monthly payment obligations, including credit card debts and bill payments. Lenders rely on this history to assess how responsibly you will manage the SBA disaster loan you are seeking.

If your credit history is unimpressive, you will not receive a favorable credit rating. It's important to note that you need a credit score of at least 620 when applying for an SBA disaster loan. However, a higher credit score improves your chances of swift approval.

Insufficient Collateral Offered

Collateral refers to assets owned by you or your business that serve as security for your lender if you cannot repay your loan.

The U.S. Small Business Administration (SBA) defines collateral as an additional form of security that assures the lender of an alternative source for loan repayment. Collateral is crucial as it reassures the bank or lender that they can either recover the borrowed money from you or in any other way beneficial to them.

When applying for an SBA disaster loan of at least $25,000, you must provide collateral as a guarantee. Collateral can take the form of property, such as real estate, or it can be represented by your business's cash savings, equipment, accounts receivable, or inventory.

What if you lack collateral? Unfortunately, collateral is typically necessary, particularly for larger SBA disaster loans. If you don't have sufficient collateral, you may consider federal grants as an alternative funding option to sustain your business during challenging times.

Your Industry Presents Higher Risk

The pandemic has impacted almost every industry, forcing businesses of all types to adapt their operations to lockdowns and safety measures. However, specific industries have been more severely affected than others.

An extensive article published by S&P Market Intelligence highlights the five industries most affected by the global economic crisis: airlines, oil and gas drilling, restaurants, auto parts and equipment, and leisure facilities. Securing funding may be particularly challenging if your business operates within any of these industries.

Moreover, some industries are inherently perceived as high-risk by lenders and banks, such as gambling restaurants and tech startups.

If you believe that the reason for your SBA disaster loan application denial is related to the industry you belong to, research to find lenders specializing in your industry. Inquire about the supporting documents you can provide to demonstrate the trustworthiness of your business.

Debt Utilization

Lenders expect borrowers to utilize only 30% of the total credit. If you exceed this threshold, you may be considered overextended, raising concerns about your ability to repay the loan before the due date.

For instance, if you were granted an $80,000 line of credit and have already utilized $70,000 of it, you may be seen as a higher risk. It's important to remember that your financial decisions are reflected in your credit history, which the new lender will review.

On the other hand, underutilizing or not having any funding can also have negative implications for your loan application. While having no past debts demonstrates a lack of credit history, it also provides lenders with no basis to evaluate your repayment discipline.

Furthermore, having credit diversity is beneficial. When applying for an SBA disaster loan, ensure that your credit history includes previous payments for business credit cards, lines of credit, personal loans, and other credit sources. Diversifying your credit sources gives lenders a better understanding that you can responsibly repay different types of funding.

Inadequate Cash Flow for Your Business

Cash flow refers to the net amount of cash or cash equivalents entering and leaving your business. Lenders typically evaluate your cash flow to assess whether your business generates enough income to cover expenses.

Positive cash flow appeals to lenders, banks, and investors because it indicates solid financial flexibility. Conversely, poor cash flow management can raise concerns among lenders.

Poor cash flow means your business struggles to increase liquid assets, meet monthly obligations, distribute profits to shareholders, cover expenses, and maintain a financial safety net during emergencies. Poor cash flow can lead to business failure if not addressed early on.