SBA loans are paid by taxpayers, so they are precious and not necessarily abundant. On top of that, applications take a long time and require a lot of paperwork. Before you submit yourself to this complicated process, it’s important to know if you’re even eligible for the loan. Here are some reasons why you might not qualify:
1. You Don't Have a High Enough Credit Score
While technically there’s not a credit cutoff, most lenders will only work with business owners who have good (or excellent) credit scores. But, a poor credit score isn’t the end of the world either.
If you’re not sure why your credit isn’t the best, get your credit report and go through it. A lot of times there are errors that will bring your number down, and simply failing to fix an error on your credit report is a horrible reason to not get an SBA loan.
Correct errors, close credit cards, do whatever you need to do to improve your credit—it’s worth it. In the lending world, it’s hard to do anything with a bad score following you around.
2. Your Business Isn't at Least Two Years Old
This one is just like it sounds. The SBA only finds businesses who have been around for at least a couple years. If you’re too new, your business is automatically disqualified.
3. You Aren't in the Right Industry
While the name makes it sound like SBA loans are for any small business, they are only offered to US-based, for-profit businesses in eligible industries. Do yourself a favor and double check that your industry is not one of the few they won’t cover.
4. If you Have too Many Assets
If the SBA sees that you have a ton of assets, they’re not going to lend you money. They want to see that you’ve truly tried to get financing elsewhere.
Of course, you don’t want to get to the point where you’re completely broke and filing for bankruptcy, but you also don’t want to be the guy in the Gucci jacket looking suspicious standing in line at the soup kitchen.
When you apply for the loan, bring proof that you’ve tried to get funding from other lenders. Also, you’ll want proof that you don’t have secret personal or business assets to fall back on.
5. Have you Invested in the Business Yourself?
This goes hand-in-hand with point four. The SBA’s argument is that if you haven’t invested enough time and money into your business, the SBA shouldn’t have to contribute either. They don’t want to stick their necks out for your business if you’re not willing to take the risk yourself. They want to see that you really need the SBA loan, that you’ve explored other options.
6. Do you Have Collateral?
Not all, but some, SBA lenders will require collateral. This might be your business’s assets, or your own. Usually, a lot of collateral isn’t required as this is just backing up the portion of the loan the SBA won’t cover.
Do you Have a Delinquency or Default on a Government Loan?
A delinquency or default is never good. Having that on your record could mean the difference between getting approved or not. In fact, one of the top reasons why SBA loans are rejected is because a business owner defaulted on a federal student loan.
On that note, another top reason for rejection is that one of the business owners had some sort of criminal past. If any business owner is currently caught up in criminal proceedings, or is on parole, this disqualifies their business automatically.
So, if you’re looking to expand and bring on new partners, be careful about who you’re bringing on.