Considering applying for an SBA loan?
Afraid that all your time and effort will leave you saying “Why did my SBA loan get denied?”
- Lack of collateral
- Applying at too big of a bank
- Personal credit score less than 680
- Business credit score (SBSS) less than 160
- Poor business plan and financial projections
- Lack of business equity
- Poor/lack of documentation
- Lack of industry experience
- Applied for more/less than the lenders maximum/minimum
These are some of the reasons your SBA loan might get denied. At least according to a sampling of Reddit users. Reddit can be helpful, particularly in cases like this. It is usually a cesspool though. So, I saved you a trip.
SBA loans are highly sought-after because they have reasonable interest rates and long repayment terms. If you’re considering pursuing an SBA loan, browse through the following testimonials to get a better feel for how hard it can be to get approved. Hopefully, it will help you be better prepared and will increase your odds of approval – if you decide to apply.
Do you need collateral for an SBA loan?
user/TheSuperDanks
If you have minimal collateral, good fucking luck.
My buddy who is extremely credit-worthy had to basically sign his life over to get his SBA loan. He owns 2 houses, has great credit, etc. The program is just a ton of paperwork.
Source
This Reddit user seems to think collateral is needed for an SBA loan. Granted, they didn’t apply for the SBA loan themselves. It was a “friend.” However, as you read on, you’ll see that a lot of other users corroborate the notation that considerable collateral is almost always necessary.
Here’s an idea of what types of collateral the lender might be looking for:
- Real estate
- Equipment
- Inventory
- Accounts receivable (AR)
- Personal assets
Chances of getting approved for an SBA loan
user/prosignandgraphics
I have applied twice and received an education in the process.
Application Attempt #1: full business plan, a lot of drive, lots of experience in my field, a great idea but no assets to secure the risk = NO WAY
Application Attempt #2: 5 years of experience under my belt, solid cash flow, good chunk of savings, equipment and A/R to secure the loan risk = YES, how much do you want?
So basically, if you already have the money / collateral / cash flow you have a good chance of getting the loan. If you have no assets, cash flow, accounts receivables, savings etc. then your chances plummet to practically nothing.
Source
This user, again, cites the importance of collateral.
If they’re to be believed, they had a lot going for them when they tried to get approved for their first SBA loan. However, they had no assets to help secure it.
It should be noted that they also had five years of experience upon the second application. It’s unknown how much they experience they had upon the first application. The implication is that they had very little.
Nevertheless, while the experience helped, it seems obvious that collateral contributed to them getting approved the second time around.
So, what are the chances of getting approved for an SBA loan?
Well, it seems to depend on the type of bank you apply at.
Large banks are choosier – only approving approximately 25% of SBA loans.
Small community banks and credit unions are what SCORE recommends that small businesses use. They might be on to something because these types of institutions will approve almost twice as many SBA loans. Source.
Are you personally liable for an SBA loan?
user/Pseudo_Prodigal_Son
So the easiest way to make sure your loan gets approved is to own an asset that is worth as much as the loan amount.
Almost all banks doing SBA loans will want an asset to guarantee the loan. And unless the business has large assets (e.g. a building) they can use as collateral, they will want to use your house as collateral. If you business fails, they will take your house. If you don’t own a home or have other suitable collateral, they will not give you a loan.
Source
This user gets a little more specific regarding collateral. They state that the assets you use for collateral need to be worth twice the loan amount.
While that might not be technically true, it’s generally believable. I’ve worked in personal lending for a while and I know that lenders rarely lend 100% loan-to-value (LTV).
Why do banks loan less than 100% LTV? Because, in a worst-case scenario, when they have to repossess the asset, they’ll rarely get what it’s “worth.” The liquidity of the asset can be very low and/or they’re in a hurry to sell it. Not to mention the asset is probably in less-than-stellar shape. Therefore, they get less than market value. That’s why they like to lend less than 100% LTV.
How much less depends on other factors related to creditworthiness.
As mentioned above, personal assets can potentially be used as collateral in lieu of business assets.
Also, if you own more than 20% of the business, you have to provide a personal guarantee for the SBA loan. Because of these factors, you are most certainly personally liable for an SBA loan.
What credit score is needed for an SBA loan?
user/__Focused__
Loan broker here.
Most SBA-backed lenders won’t touch a deal that is below $50K. Your credit is also bordering on the minimum (many want 680+) and a loan would likely weigh heavily on your assets and/or downpayment.
Source
Here, we see a user touch, again, on collateral. However, they also focus on some different requirements. Specifically, the minimum personal credit score of 680 and the minimum loan amount of $50K.
Keep in mind that there are SBA loan options for less than $50,000 – as mentioned in other testimonials.
The personal credit score needed for an SBA loan is set by the lender, not the SBA. So, the minimum personal credit score will vary.
Generally speaking, if your personal credit score is below 640, it’s very unlikely that you’d get approved for an SBA loan. In fact, plan on having a personal credit score of at least 680 to be “good enough.” As always, though, an even higher personal credit score can only help you.
As far as a business credit score goes, plan on having an SBSS (business FICO) of 160 or greater. No less than 140. Source.
What documents are needed for an SBA loan?
user/sawbucks
I’ve been successful at acquiring two separate sba backed loans. As another has mentioned you will have to write a business plan showing how you intend to use the money, how that plan will increase your revenue, and also how much additional revenue you intend to see. I used my first loan to purchase an existing business and had to show how I intended to improve the current business and come up with 3 years of projections and show how each part of my plan would affect these numbers over time. It was very involved including phone interviews with the underwriter and a very deep dive into the business itself. I was told something like 70% of sba loans dont get approved but if you have strong financials and a strong plan for the money I think youd be ok.
Source
This user had to come up with a full business plan and financial projections.
This intensive documentation shows the lender that you have thoroughly thought out how you’re going to invest those SBA loan proceeds in your business. You’ve also considered the environment your business will operate in and what effect it will have on your operations.
Numbers don’t lie (usually), so you can’t hide behind abstract promises when you are forced to come up with solid financial projections.
Beyond the documents needed for the SBA loan, notice how the lender also made them qualify their assumptions. So, be prepared to “defend” your position when you apply for this type of financing.
How long does it take to hear back on an SBA loan?
user/abcriot
I just got an SBA loan for $100k, guaranteed by the state (CA). I have a service based virtual business out of my home. I’ve been in business less than 1 year, which is seen as risky. They required I put a capital injection of 20% ($20k), so I had to show that I in my year of business I had put at least $20k of my own cash into my business.
The whole process wasn’t to hard, but it was long. I started in November and got funded the second week of March.
Source
This user bucks some of the other’s experiences. They make no mention of collateral. Just a contribution to capital of 20%.
This goes to show that not all SBA lenders are the same. So, if you are declined at one lender, don’t give up!
The user also claims that the hardest part of getting an SBA loan was the wait.
Their experience doesn’t seem to be too out-of-the-ordinary. From start to finish the process for getting an SBA loan seems to run anywhere from 60 to 90 days. More in some cases.
It’s hard to say when in November this user started the loan process, but, at the most, it only took them one month longer than usual to hear back on their SBA loan.
This could have been due, in part, to the amount of time it took them to assemble the needed documentation. It’s difficult to know. As specified in other testimonials, the documentation requirements can be considerable.
Therefore, try to assemble the needed documents ahead of time. Also, don’t wait until you absolutely need the financing to apply. By the time you hear back, you could have missed the opportunity you hoped to capitalize on. Or, if times are tough, you might have missed the chance to right the ship.
Can you get an SBA loan for a startup?
user/nickwimp
Can you provide a overview of what’s required to qualify for a SBA loan? my father and I are starting a machine shop and need a total of 350k to get the doors open. machine costs are around 250k. Thanks
user/saxscrapers
Solid, well-thought out business plan. Personal credit scores above 640 or if not, a really good story for why so low. All owners greater than 20% guaranteeing loan. For start ups, equity injection of 20-30% (or more- it would only help). Post-transactional (after loan has been made) liquidity of the owners to fund any short term expenses that were not foreseen or some sort of outside income. Good experience of the owners/managers.
If you have all of those things, you should be pretty good. All banks have different credit tastes and prefer some industries to others, so just because one bank is not interested doesn’t mean a different one wouldn’t be willing to work with you.
Source
This testimonial, and a few that follow, are from an “ask me anything” (AMA) Reddit post. In this post, an individual claiming to be a credit analyst for an SBA lender answered some other user’s questions.
This particular user asked about getting an SBA loan for their startup machine shop.
The credit analyst touched on some previously mentioned requirements such as credit score and personal liability. They also mentioned the “skin in the game” needed to get an SBA loan for a startup.
As mentioned previously, 20% equity is pretty standard. This shows the lender that you have something significant at stake. Which, in turn, increases the likelihood that you’ll repay the loan rather than walking away from the venture if times get tough.
The credit analyst mentions that 30%, or more, will only increase your chances of getting an SBA loan for a startup. In the lender’s mind, the more you have at stake, the more you’ll work to succeed.
The credit analyst goes on to mention how financial projections are important. But, they aren’t going to be precisely correct. So, consider how you might finance any near-term startup expenses that you didn’t anticipate.
Finally, the credit analyst mentions something that hasn’t yet been addressed in a testimonial. That’s industry experience. This is an intangible that can help you get an SBA loan for a startup. It won’t necessarily overcome some of the quantifiable requirements (credit score, equity, collateral). But, it can help influence a lender that might be on-the-fence about some of the other aspects of your business plan.
Does an SBA loan show up on a credit report?
user/moneymonda
Do you run business and personal credit reports in the loan approval process? If so on the business credit reports, are they through experian or dnb or something else? How much do the business credit scores weigh on the approval process since it can be common for a small business to not have many (if any) tradelines reported to the bureaus?
user/saxscrapers
We absolutely run personal credit reports on all guarantors of the business (SBA requires anyone with 20% or more to guaranty, or if a spouse owns between 5 and 20%, but the other spouse has over 20%, they both must guaranty). The initial bank i was with did not order business credit reports as they were rather small, but the bank i am with now does. Depending on the type of business, trade line history can range from not applicable (for cash businesses) to pretty important. The business credit reports are from either DnB or CreditSafe and show tradeline history, and collections or tax liens that are outstanding or were in the past and any UCC liens on the business. The business credit reports aren’t as influential as the personal credit scores, but do carry some merit.
Source
This user asked the credit analyst if both personal and business credit reports were run during the SBA loan application process. In particular, they wanted to know what agencies were used to pull credit. Finally, they were interested in what weight was placed for each (personal and business) credit report.
From what the credit analyst conveyed, personal credit reports are almost certainly going to be run on any individual with significant ownership in the business. And, possibly on their spouse.
Business credit reports are a different story. This is up to the lender and may depend, in large part, on the industry you operate in. Additionally, the credit analyst stated that business credit reports didn’t weigh as heavily as personal credit reports. Which is somewhat counterintuitive since SBA loans are, technically, business loans.
Knowing that credit will be pulled might lead you to ask “will an SBA loan be reported on my credit in the future?”
Details are hard to find here, but it seems that the SBA loan will show up on your business credit report. Not on your personal credit report. Even though you will likely provide a personal guarantee on the loan. Source.
How many times can you get an SBA loan?
user/luxorius
How long does it take to obtain a SBA loan, on average? What is the smallest and largest loan size available, typically? What is the duration of the instrument? Do SBA loans typically fund a company more than once? What is the minimum balance sheet coverage and other collateral coverage that SBA loans are backed by? What types of ratios and covenants comprise SBA loans?
user/saxscrapers
From start to finish, if you have all documents needed to underwrite your loan, it can take as little as 2 months from application to closing, but those are pretty rare. Time is always a huge variable, and depending on the nature of the transaction, they can take as long as 6 months or so.
Smallest loan size depends on the bank. The bank I work at doesn’t do anything less than around $150K. There are microloan providers which only focus on loans less than $100K or so.
Duration is 7 years for working capital, 10 years for leasehold buildout/business acquisition, 25 years for real estate purchase or refinance, building improvements and possibly for equipment purchase if you can prove the equipment you are purchasing will have a useful life of 25 years. All SBA loans are fully amortized with no balloon payment.
There is no minimum balance sheet coverage for SBA loans. There is a minimum of 10% tangible net worth for USDA loans.
The great thing about SBA loans is that they are designed for borrowers that don’t meet conventional collateral requirements. Banks are specifically told to not turn down loans based on a lack of collateral given all other factors of the loan are positive (cash flow, credit scores, management capability). The one thing to note, though, is if the loan isn’t fully secured, banks are required by the SBA to lien personal real estate of the guarantor/principal if there is 25% or greater equity in the real estate.
There are circumstances where the same company will get multiple SBA loans but that is a pretty uncommon occurrence. You will see guarantors with multiple businesses that have different sba loans for their different businesses.
Ratios that we use the most are current, quick, debt to tangible net worth, gross profit margin, net profit margin, days receivable, days payable and days inventory.
Source
This user had a lot of questions and the credit analyst took the time to answer them in-depth. So, there’s a lot to address here.
First of all, the credit analyst confirmed what had been addressed in an earlier testimonial. That the quickest you can expect the SBA loan process to go is two months. What was surprising was that they also said it can take up to six! This reinforces my earlier advice to plan well in advance.
The largest SBA loan you can get is $5 million. This is a firm number.
The smallest, though, depends on the lender. Keep in mind that the SBA has several different loan programs, some of which are designed for smaller loan amounts. This would be a good question to ask before the loan application process starts. So that you don’t waste your time and hurt your credit if the amount you need is below the lenders minimum.
From there, the credit analyst addresses the term of SBA loans. This depends, in large part, on what the proceeds will be used for. If it will be used for expenses (working capital) the term will be short. If it will be used for long-lived assets, the term can be longer. Of course, the longer the term, all things being equal, the lower the payment.
Next, we have some new insight, not discussed in any of the other testimonials. It comes back to the topic of collateral. According to the credit analyst, if your collateral isn’t worth enough to fully secure the loan, the lender will put a lien on your personal residence. In fact, they’re required to by the SBA.
I confirmed this elsewhere. Source.
This is very important!
While SBA loans are hard to get approved for, in light of collateral requirements. These requirements can actually be in your favor. Remember the testimonial earlier that mentioned having 2x the loan amount in collateral? That’s probably a good rule-of-thumb to keep in mind, should you decide to pursue an SBA loan.
The credit analyst goes on to briefly touch on financial ratios. These will vary by industry and be calculated in your financial projections.
Finally, maybe the most pressing question in this testimonial is “how many times can you get an SBA loan?”
This depends on what you mean by “how many times.”
Of course, if you got an SBA loan and paid it off you can get another. Assuming that the loan stayed in good standing, I could only see it working in your favor.
What about multiple SBA loans at once?
Well, it technically can be done. Up to a given SBA program’s limits. Source.
But, according to the credit analyst, it’s pretty uncommon. It’s unknown if this is because of how hard it is to get approved for an SBA loan. Or, for another reason. The exception is an individual who owns multiple businesses and takes out an SBA loan for each.
Why did my SBA loan get denied?
As you can see, there are many reasons an SBA loan might get denied. These loans are hard to get approved for and the requirements are stringent. Fortunately, there are other options if you decide an SBA loan isn’t right for you or you get denied. Good luck!