Loans that are backed by the U.S. Small Business Administration (SBA) are attractive for 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.
Problem: You’re a startup
Solution: Borrow from other lenders that loan to startups
Most banks will not issue SBA loans to startup companies. They require a couple years in business or, when do they lend to startups, they generally expect the business owners to have experience in the industry.
As a startup, it can be hard to raise capital. Although the news makes it seem like every startup has millions in dollars of funding by venture capitalists, most startups are small local businesses. If you fall into that category, you will likely get rejected for an SBA loan, but you do have options.
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 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.
Problem: Low credit score
Solution: Seek a lender that doesn’t check credit or requires only decent credit
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. You probably will be rejected for an SBA loan, but you may have better luck with lenders that that care less about credit score and have a more holistic evaluation process.
For example, you can try a short-term business lender like OnDeck or Kabbage. They approve borrowers with credit score of 550 or less.
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.
Problem: Not enough collateral
Solution: Go with a lender that doesn’t require collateral
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. Even though the SBA backs up to 75 percent of the loan, 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.
There is good news and bad news in response to this problem. The good news is that most short-term lenders like OnDeck and Kabbage don’t require a specific amount of collateral for a loan. It’s ok 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.
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 don’t care much about the assets that you own. Examples include Accion, PayPal Working Capital, Fundbox, and Behalf.
Problem: You don’t want to personally guarantee the loan
Solution: Choose a lender that doesn’t require personal guarantees
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. It you don’t want to personally guarantee an SBA loan, then you won’t qualify.
Alternative lenders such as PayPal Working Capital, Fundbox, and Behalf don’t require a personal guarantee. In addition, although most short-term business lenders require a personal guarantee, Kabbage does not.
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 APR.
Problem: You’re in an excluded industry
Solution: Choose a lender that doesn’t have strict industry exclusions
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, certain types of health businesses, and more.
If you’re in an excluded history, there are lenders that are very liberal in the types of businesses they lend to. For instance, Fundbox will lend to any legal U.S. business that invoices customers in U.S. currency. Behalf will lend to any legal U.S. business that has a bank account and a social security number for the primary owner. Similarly, PayPal Working Capital is open to PayPal businesses in the U.S., U.K., and Australia.
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. Today, there are more loan options than ever for small businesses, and we encourage business owners to learn about all their options and choose the best one that is open to them.
Have you had experience with any of these alternative lenders? This article is part of our Small Business Loan Guide, check out this page for expert tips and advice on loans.