Loans that are guaranteed by the U.S. Small Business Administration (SBA) are pretty attractive for small business owners due to the fact that they provide a variety of loan sizes, long repayment terms, and relatively low interest rates. Simultaneously as a few alternative business lenders charge as high as 80% APR, you could get an SBA guaranteed loan for around 7% annual percentage rate, based on the amount you’re looking to borrow and for how long.
So what is not to like about SBA loans? Unfortunately, it can be difficult to get approved. Many businesses that need SBA loans get turned down by banks for one reason or another. Here are the four most important reasons that the SBA loans get rejected, and a look at your alternatives.
- You’re A Startup Business
Borrow from other lenders that fund to startups. Most of the banks will no longer provide SBA loans to startup businesses. They need a couple of years in business or, when do they lend to startups, they typically count on the small business owners to have experience in the industry. As a startup business, it can be quite difficult to raise the required capital. Although the news makes it seem like every startup has millions of dollars of funding by way of venture capitalists, most of the startups are small businesses. In case you fall into that category, you’ll get refused for an SBA loan; however you do have some other options.
- You’ve Low Credit Score
Look for a lender that doesn’t requires only decent credit. To qualify for an SBA loan, you have to have a solid credit score—at least 600 for most of the banks. If you fall short of that, that’s OK. You will likely be rejected for an SBA loan; however you can have better luck with lenders that will care less about credit score and feature a more holistic assessment process.
- You Don’t Have Enough Collateral
Choose a lender that doesn’t require collateral. Since the financial downturn, banks are particularly risk averse and need to protect themselves in the event that a small business owner cannot pay back the borrowed amount. Despite the fact that the SBA guarantees as much as 75% of the loan, the bank continues to be on the hook for the remaining 25%. Additionally, the collateral that you provide is split between the SBA and the bank. Consequently if you cannot collateralize a large part of the loan amount, there’s a great chance that your application might be rejected.
There is both good and bad news regarding this problem. The good news is that the most short-term lenders don’t ask for specific amount of collateral to release a loan. It is OK if you don’t have expensive equipment or property to back the loan with. And the bad news is that they’ll place a lien on your preferred business assets, whether your property add up to the value of the loan or not. Because of this they can sell off your business assets in case you don’t pay back the borrowed amount.
- You Don’t Want To Guarantee The Loan
Pick a lender that doesn’t require personal guarantees. When you personally guarantee a loan, you’re personally responsible for paying back the loan, although the business doesn’t do well or closes down. In case you don’t pay back the borrowed amount, a personal guarantee allows the lender to sell off your personal assets to get the SBA loan.
Traditional lenders would require personal guarantees for SBA loans; however even sincere borrowers may not need a personal guarantee hanging over their head. In case you don’t want to personally guarantee an SBA loan, then you will not qualify.