Reasons Why You Do Not Qualify for an SBA Disaster Loan

Maintaining your business through hard economic times has probably led you to cut down on costs, revise your sales projections, and possibly seek out a loan to help you stay afloat. The Small Business Administration (SBA) has created a disaster loan that has less strict eligibility criteria and a streamlined application process to make more funds available for more businesses.

If you have applied for an SBA Disaster Loan and have found that your application was denied, it is not the end. Here we will discuss the top reasons why your application was denied and what you can do to secure funding on your second attempt.

Reasons Why Your Disaster Loan Application Was Denied

When you apply for a loan, there might be a chance that you did not receive an answer as to why you were not eligible. The following lists are examples as to why your application was denied.

Your business is new

If your business is new you might not get approved by banks for a traditional SBA loan. They require you to be in business at least for a couple of years and expect the owners to have experience in the industry.

For the disaster loans, your business needs to have been up running long enough to show financials to prove that you were negatively affected by coronavirus. You will most likely need reports that show at least 12 months of financial activity.

Many startups are small, local businesses with hopes of eventually scaling fast, but they are still establishing a track record. Investors and banks want to see some evidence that shows you are going to be able to repay them. There are options available if your business has only been operating for a few months. Showcasing strong cash flow that fell when the crisis hit or large amounts of outstanding accounts receivable may be enough to help your case. Any financial proof that you can provide, be sure to include it.

You have a low credit score

There is a chance that they will run a credit check on you during the approval process. To qualify for a traditional SBA loan, you need to have a strong credit score of at least 600 for most banks. However, the value depends on the lender and it might not be as high when you apply for the Disaster Loan.

If you do not have good credit, you most likely will not get an SBA loan. Try to find short-term ways to improve your personal credit score so that you have a better chance of being approved.

You do not have collateral

Lenders are looking for you to be able to put some collateral as assurance that they will be able to get their money back even if your business fails. The collateral you provide is split between the bank and the SBA. If you cannot use collateral for part of the loan amount, then you might be rejected.

Debt utilization

High or low debt utilization is a red flag for lenders. If you currently have outstanding loans or a line of credit that is close to being maxed out, you are a much riskier applicant. Also, if you have never take on debt or do not have a credit history, lenders do not know if you will be responsible for handling a loan. If you have any outstanding debt, try to pay it down. Try to build your history of debt management by applying to smaller lines of credit and making sure that you are paying that off regularly.

Poor cash flow

Cash flow is one of the first things that lenders take a look at when determining eligibility, which is one of the documents needed to include with your SBA application is your cash flow statement from the previous years. They want to understand how likely you are going to pay back the loan.

Risky industry

Some traditional lenders may be less likely to approve you if you are in a risky industry. An industry that is risky includes retail, real estate, restaurants, lending services and more. However, showcasing the financials before the crisis, a business plan and being a specialist in your industry can help.

You need to ask for more money

Banks and other lenders prioritize larger loans when there is a large influx of applicants. Secondly, if a requested loan is below a certain amount, depending on the size of the lender, the cost to service that loan is too high to make it worth it for them.

Missing documents

One of the easiest ways to get denied is by missing documents and or having an incomplete application. Maybe the lender was not specific, or you just forgot to include some documents from your financials. Remember to double check everything before you submit a document.

Next Steps

  • Try to appeal your denied application
  • Verify your lender requirements
  • Prepare and update your loan application

Alternatives to Reapplying

Find an alternative lender – maybe the lender that you chose was not the best fit for your business or financial situation. Explore other approved lenders that may be a better fit.

Explore funding alternatives – if you do not qualify for an SBA Disaster Loan, look at other options for funding.

Revisit your forecasts

Revisit your forecasts and you might find alternative solutions to cut costs that do not require outside funding or develop more financial forecasts that help represent your business with future applications.

The Bottom Line

No matter what type of loan you are applying for, you need to have clear financial documents. If you stay on top of updating your business plan, it can help you avoid putting these together. You can also use your business plan as a tool to track the financial health of your business.