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12 Jun Why SBA Loans Seem out of Reach for Many Small Businesses

If you want to apply for a small business loan and have considered going with the Small Business Administration, you may be surprised to learn that it’s difficult to get an SBA loan. The SBA serves to “aid, counsel, assist, and protect the interests of small business owners.” However, banks can be timid about lending to small businesses, making obtaining SBA funding for your business a challenge.

When applicants get denied – whether for an SBA loan or otherwise – they often don’t know why. A recent poll by Nav found nearly a quarter of all small business owners are in the dark about why they were rejected.

Here are five main reasons small businesses fail to get a loan approved through the Small Business Administration – along with steps to avoid these roadblocks:

1. Considered a Startup

Owning a brand-new business is one of the top reasons it’s difficult to get an SBA loan. Traditional lenders view funding startup businesses as “risky.” They usually require the business to be at least two years old before they’ll consider an approval. Lenders are more likely to approve a loan application when you can show consistent, positive cash flow; ideally over several years. Every small business owner must start somewhere, but being unable to show the bank revenue history makes it hard to qualify for an SBA loan.

What’s the Fix?

While traditional lenders focus on the potential obstacles to granting loan approval, alternative lenders prioritize how the loan will be used. They also factor in different decision criteria – like your business plan, current revenue, and personal credit history – to help overcome traditional lending hurdles. This typically requires less paperwork from the applicant and results in a shorter decision time. So, if your startup business simply needs a quick infusion of cash to pay off outstanding expenses, consider an unsecured business loan from an alternative lender.

2. Inconsistent Cash Flow

Cash flow breathes life into a business’s functions and is a core component to its long-term success. It’s also one of the first things lenders look at when measuring the health of your business and determining your ability to pay back a loan. Having insufficient cash flow is a flaw most lenders can’t afford to overlook. So, companies that experience seasonal lulls may find it more difficult to get an SBA loan. For example, a business that specializes in holiday decorations won’t have the same amount of cash on hand in April or May that it does in November and December.

What’s the Fix?

If you operate in a seasonal industry, retail business inventory loans might be more obtainable than an SBA loan. These alternative loans are ideal for product manufacturers, retailers, distributors, wholesale traders, and seasonal businesses because they can help you meet the demands of your customers while stabilizing cash flow. Short-term business loans are also ideal for seasonal business operators.

3. Disorganized Business Documentation

When you apply for an SBA loan, it’s important to have all the required documents and background material at the ready to help make the process go as smoothly as possible.

Some applicants approach the process far too cavalierly, either by not taking time to understand the SBA loan requirements, or not preparing the documentation required by the bank. Presenting lenders with the wrong materials may make you look disorganized. Lenders may view disorderliness as a reflection of how you run your business, making it difficult to get an SBA loan.

What’s the Fix?

Every goal requires preparation. The same principle applies to the SBA loan application process. Lenders frequently hold workshops throughout the year that detail how to apply for an SBA loan and what lenders look for. Here are a few of the things you’ll need:

• SBA Form 1919
• Personal Background and financial statement
• Business financial statement (Three years’ worth of year-end profit and loss statements and balance sheets, reconciliation of net worth, etc.)
• Business certificate or license
• Loan application history (if any)
• Income tax returns
• Resumes

There are many online resources business owners can refer to when putting together a loan application. Try this helpful checklist from the SBA’s website.

4. Low Credit Score

Low credit scores are a common reason why it’s difficult to get an SBA loan. Banks are risk-averse, and usually, require borrowers to have a FICO score above 650. They may consider both your personal credit score and your business credit score. Your business credit score is calculated based on several factors, including your payment history with suppliers and time in business. If your credit score is low, lenders may conclude that you’ll have a hard time paying off your loan on top of your other monthly payments.

What’s the Fix? 

While having a low credit score makes it difficult to get an SBA loan, it doesn’t mean you are totally shut out from the credit marketplace. FICO offers several tips, including the following:

• Pay off your bills in full before the due date.
• Avoid opening new credit cards you don’t intend to use.
• Resolve missed payments and remain current.

A bad credit score takes time and effort to improve. But alternative lenders specialize in working with individuals and business owners whose credit is less than perfect by offering bad credit business loan options. By pledging a cash down payment, providing collateral or assets, signing a Personal Guarantee, and/or being amenable to a smaller loan amount, you can obtain the funding you need to keep your company operating. And improve your credit score in the process.

5. No Established Business Credit

Having already established good business credit increases your chances of being approved for a loan. Lenders like to see that you’re able to pay your company bills on time. When lenders don’t have a business credit paper trail for a loan applicant, they’ll often reference a business owner’s personal credit score to gain insight on how they manage debt. This approach is particularly common among lenders evaluating a startup business owner’s application. The SBA likes to see a track record of business credit, which is another reason why it’s difficult to get an SBA loan.

What’s the Fix?

Many small business owners don’t realize they have a business credit score or know how the score is calculated. Your business credit score can influence your business insurance premiums, lease agreements, and vendors’ terms. Therefore, it’s critical that you pay your bills in full and on time.

If you don’t have business credit, but want to build it, you can start by registering as an LLC or other legal entity. Additionally, determine if you have a federal employer identification number, which you can find through the IRS. The IRS can also help you obtain one.

An SBA loan rejection doesn’t have to be the end of the road. It can be the start of a new journey. At QuickBridge, we work hard to provide small business owners with the funding they need to succeed. Our applications are quicker, paperwork is minimal, and decisions come faster. Contact us today to get started.

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