SBA loan denied: What to do next

If you’ve been denied an SBA loan, you are not alone. According to the SBA weekly summary report, fewer than 60,000 businesses were approved for 7(a) loans in 2023 — and only around 6,000 SBA loans were approved for 504 loans, highlighting how the Small Business Administration (SBA) sets strict requirements for some of its loans.

So while there are many benefits to SBA loans, it’s not rare to be rejected after applying. Even so, there are three things to do after your application for an SBA loan is rejected to determine your next steps.

1. Find out why your SBA loan was denied

The lender you applied with should provide an explanation for its decision. In addition to the requirements set by the SBA, lenders will also have their own business loan requirements you must meet.

There are a variety of reasons why your application may have been rejected. The size of your business, cash flow and a few other factors will all play a role. If the explanation you receive isn’t clear, you can always reach out to the lender you applied with for more information.

Credit

While the SBA doesn’t have a set minimum credit score, the lender you apply with likely does. You will need to meet both a minimum personal credit score and a minimum business credit score, if applicable, to qualify for an SBA loan. Lenders may evaluate you on the five c’s of credit, which include a capacity to repay and the economic conditions of your industry.

Business size

Your business must meet the SBA definition of a small business. Some requirements include meeting minimum annual revenue requirements and having fewer than 500 employees. However, this may vary based on your industry. Your lender may have its own requirements, so check those as well.

Cash flow

You must have enough cash flow to handle payments each month. This means knowing the average loan amount approved by the SBA — and not trying to borrow beyond your means. You can do a cash flow analysis for your business to determine if you have the room in your finances to handle a loan payment, whether you apply for another SBA loan or seek alternative financing.

Industry

The SBA does not work with businesses in all industries. Unfortunately, if your business is in one of the excluded industries, you won’t qualify for any SBA loans.

• Real estate investment firms
• Businesses involved in speculative activities
• Lenders, banks, finance companies, lease companies or insurance companies
• Multi-sales distributions or multi-level marketing
• Gambling, excluding lottery sales or state-regulated gambling
• Charity organizations, religious organizations or nonprofits that rely on charity

In addition, any business that operates illegally or is involved in illegal activity is ineligible.

Finances

The SBA requires you to have invested sufficient personal equity into your business and to have exhausted all other financing options before you apply for SBA loans. This means you may need to consider first applying for a business loan through a bank or alternative lender to qualify for SBA funding. On the upside, SBA loans don’t require a personal guarantee since part of the loan is already backed by the government.

There are also revenue or income requirements for SBA lending. These vary based on the lender. Unlike traditional loans, SBA loans often have revenue or income limits instead of minimums. For instance, if you apply for a SBA 504 loan with Bank of America, your business can’t have an average net income of more than $5 million after taxes for the last two years.

To qualify for SBA lending, businesses must also demonstrate an ability to repay the loan. To that end, the potential lender will want to evaluate your business’s debts, expenses and revenue. If you’re applying for a 504 loan, you’ll also need to budget for a 10 percent down payment.

Business operations and location

You must be a for-profit business and operate in the United States to qualify for an SBA loan. This includes being fully registered with your state and/or municipality with a business license. Your industry also matters — if it is on the list of exclusions, you won’t be eligible.

2. Consider applying again

If the reason you were rejected is an issue you can solve, your business is welcome to apply again. There is a 90-day waiting period between applications. But you can use this to your advantage by focusing on improving your application and increasing your chances of approval.
Actions like improving your credit score, cash flow and personal equity in the business can all positively impact on your eligibility.

• Credit score. SBA lenders will check both your personal and business credit scores. If you can, improve these numbers by lowering your credit utilization ratio or seeking an alternative to an SBA loan while you wait to reapply.
• Cash flow. While the SBA doesn’t have an annual revenue or cash flow minimum requirement, your lender likely will. And even if neither does, your cash flow must be enough to cover the cost of the loan in addition to normal business expenses.
• Personal equity. The SBA requires each business owner to invest some personal equity into the business. If you have access to personal assets or other financial resources, determine if they can be used to further your business before you apply again.
• Documentation. Review the documents you need to submit when you’re ready to reapply for an SBA loan. Like with other requirements, there will be documents required by the SBA and additional documents required by your lender.

3.  Look at alternatives to an SBA loan

Even if you plan on reapplying, you should still consider alternatives. Between the 90-day waiting period and the SBA application processing times, it can take well over three months to receive financing. And for businesses that don’t qualify for an SBA loan, these alternatives are good choices to find the funding your business needs.

• Online lenders. For some small businesses, alternative business loans from an online lender may be easier to qualify for. These tend to have less strict requirements but may have higher interest and more fees. If you try for an SBA loan with an online lender and aren’t approved, you may want to ask if you qualify for other loan options.
• Bank loans. Banks are a traditional source of business financing, and many banks offer business loans. Requirements are usually as strict as an SBA loan. However, interest rates tend to be very competitive. If you apply for an SBA loan with a traditional bank and get declined, you may be offered a different type of loan that is better suited to your needs and situation.
• Bad credit loans. If your credit score is the main reason your application was denied and you need funding fast, consider a bad credit business loan. While the interest rate may be higher with a shorter repayment period, it will give you access to funds and help improve your credit score if you make on-time payments.
• Business credit cards. You may want to consider a business credit card if your business has frequent, small expenses.
• Lines of credit. Similar to business credit cards, business lines of credit offer flexibility for small, recurring expenses. Plus, they tend to have lower rates than credit cards.
• Grants and crowdfunding. Businesses involved in public service or nonprofits, which may not qualify for SBA loans, could turn to grants and crowdfunding for financing you won’t need to repay.
• Personal loans. If you are not yet in business or have less than a year under your belt, you could consider a personal loan as an alternative form of financing for your business.
• Merchant cash advance (MCA). Merchant cash advances are easy to qualify for and give you a cash advance for future credit and debit card sales. Fees and interest rates are significantly higher than other options but do provide fast funding and a quick approval process.

The bottom line

Many businesses can’t qualify for an SBA loan, but that doesn’t mean there aren’t other options available. Once you review why your application was rejected, you can choose to apply again or explore alternatives.

Whatever you decide, you may want to explore more business loans to find the right lender and loan for your business.

Frequently asked questions

• What happens if your SBA loan is denied?

  You should review your application and the rejection letter to see what you can improve before you reapply or find alternative options.

• Can you reapply for an SBA loan?

  Yes. The SBA allows you to reapply after 90 days, provided you are eligible.

• What credit score do you need for an SBA loan?

  There is no listed score for an SBA loan, but the average business loan credit score is in the good to excellent range — a FICO score of 670 or higher.