If you’re looking for funding to finance starting or growing your small business, you’ve probably heard about SBA loans. Loans that are backed by the U.S. Small Business Administration (SBA) are attractive for small business owners because they offer a range of loan sizes, long repayment terms, and most importantly, low-interest rates. While some alternative business lenders charge as high as 80 percent APR, you can get an SBA-backed bank loan for around seven percent APR, depending on the amount you’re looking to borrow and for how long.
So what’s not to like about SBA loans? Unfortunately, it can be difficult to get approved. Many businesses that want SBA loans get turned away by banks for one reason or another. Here are the five main reasons that SBA loan applicants get rejected, and a look at your alternatives.
1. Your business is brand new or hasn’t launched yet
Most banks will not issue SBA loans to brand new businesses. They often require you have a couple of years in business, or, when do they lend to new companies or startups, they generally expect the owners to have experience in the industry.
As a new business, it can be hard to raise funding. The news makes it seem like every startup has access to millions in dollars of funding by venture capitalists or angel investors.
Many startups are small, local businesses with hopes of eventually rapidly scaling—but they’re still establishing a track record. Both banks and investors are going to want some evidence that you’re going to be able to repay them. If your business—whether it’s a startup or a small business—is brand new, you will likely get rejected for an SBA loan, but you do have options.
Solution: Borrow from other lenders that loan to early-stage businesses
You can borrow from a nonprofit such as Accion, a popular nationwide loan provider that specializes in lending to brand new businesses. You won’t be able to borrow too much money from such sources however—Accion lends a maximum of $30,000 to new businesses and startups.
Alternatively, you can borrow based on cash flow. For instance, if you have a lot of online sales and have just three months of sales history, you could borrow from PayPal Working Capital. If you have a lot of credit or debit card sales, you could get a merchant cash advance from a provider like CAN Capital.
2. You have a low credit score
To qualify for an SBA loan, you must have a strong credit score—at least 600 for most banks. If you fall just short—or far short—of that, that’s ok. If you don’t have great credit, you will probably be rejected for an SBA loan, but you may have better luck with lenders that care less about credit score and have a more holistic evaluation process.
Solution: Seek a lender that doesn’t check credit or requires only decent credit
Approach short-term business lenders with caution. They often approve loans to individuals with lower credit scores, but you want to be confident you can repay on time—otherwise you’ll probably find your loan subject to unusually high-interest rates. Then there are lenders that don’t check credit score at all—Fundbox, Behalf, and PayPal Working Capital are examples. Those companies emphasize other criteria.
For instance, Fundbox lends money based on unpaid invoices and will look at how likely it is that someone who owes you money will actually pay you. Behalf does purchase financing and mines the internet for social media and other data about your business to assess your creditworthiness. PayPal, mentioned above, looks at your PayPal sales history and volume in deciding whether to lend you money.
3. You don’t have enough collateral for a loan
Since the economic downturn, banks are especially risk-averse and want to protect themselves in the event that a business owner cannot pay back a loan. They’re looking for you to put up some collateral as assurance that they can recover their money, even if your business folds. Even though the SBA backs up to 75 percent of SBA loans, the bank is still on the hook for the other 25 percent.
Moreover, the collateral that you provide is split between the SBA and the bank. So if you cannot collateralize a large part of the loan amount, there’s a good chance that your application will be rejected.
Solution: Go with a lender that doesn’t require collateral
There is good news and bad news in response to this problem. Some short-term lenders like don’t require a specific amount of collateral for a loan. It’s O.K. if you don’t have expensive equipment or real estate to collateralize the loan.
The bad news is that they will place a lien on your general business assets, whether your assets add up to the value of the loan or not. This means that they can sell off your business assets if you don’t pay back the loan. Plus, if you’re looking at high-interest rates and penalties if you can’t pay your loan back according to the schedule you agree to.
But some lenders that loan smaller amounts of money don’t require collateral or a lien. They usually base their lending decisions on your business’s cash flow and they don’t care much about the assets that you own. Examples include Accion, PayPal Working Capital, Fundbox, and Behalf.
4. You don’t want to personally guarantee the loan
When you personally guarantee a loan, you are personally responsible for paying the loan back, even if the business doesn’t do well or closes down. If you don’t pay back the loan, a personal guarantee allows the lender to sell off your personal assets (e.g. your home and car) to satisfy the loan.
Banks will require personal guarantees for SBA loans, but even sincere borrowers may not want a personal guarantee hanging over their head. If you don’t want to personally guarantee an SBA loan, then you won’t qualify.
Solution: Choose a lender that doesn’t require personal guarantees
Some alternative lenders such as PayPal Working Capital, Fundbox, and Behalf don’t require a personal guarantee.
If you choose a lender that doesn’t require a personal guarantee, however, you will have to make some sacrifices. Primary among these are size and cost. If you’re not willing or able to personally guarantee a loan, you cannot borrow a lot of money, and you should be prepared to pay a higher interest rate.
5. You’re in an excluded industry
You might look like the picture perfect applicant: high credit score, several years in business, and enough collateral. Even if you have all that, you will still get rejected if you’re in an industry that is ineligible for SBA loans.
Excluded business types include life insurance companies, lobbying organizations, certain types of franchises, cannabis-based businesses, certain types of health businesses, and more.
Solution: Look for another lender or funding option
If you’re in an excluded industry, there are lenders that are more liberal in the types of businesses they lend to than the SBA. Look into other lending options, but don’t be afraid to seek other forms of funding too.
SBA loans are great low-interest rate loans for your business. But if a bank rejects your application for one of the reasons above, there are other lenders that may be willing to work with you. You might find that seeking funding from venture capitalists or angel investors makes more sense. Or maybe you’ll have better luck accessing the resources you need through crowdfunding or even keeping your day job for a while to finance your businesses’s growth in the short term.
We encourage business owners to learn about all their options and choose the best one that is open to them. Check out the Bplans guide to finding funding your business for more ideas.
This article is part of our Small Business Loan Guide, check out this page for expert tips and advice on loans.
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