Getting a denial on your Small Business Administration (SBA) loan is certainly not the end of your entrepreneurial journey. Instead, think of it as a road bump that can allow you to improve and better prepare yourself for the path ahead.
The acceptance rate for SBA loans—and business loans, in general—is inherently low. But don’t let that deter you from getting the financing that you need. If you get a denial letter in the mail, here are the steps that you can take next:
1. Determine the reason for the denial
The first step that you should take is to find out why you were denied in the first place. A denial letter from the lender or bank will include the reason for the denial in detail. This could be from not having enough credit to having a business plan wherein the lender does not see adequate potential. Keep in mind that a denial reason from one lender may not apply to other financial institutions, so do not take the rejection too harshly.
If the letter of explanation is not clear to you, you are welcome to reach out to the lender and ask them to explain further why they cannot work with you. If possible, appear in person to have a face-to-face conversation about the reason for denial.
By understanding why you were denied, you will be better equipped to work on your next application.
2. Strengthen your application
Now that you know the reason why you were denied, you can start improving your application. If your reason for denial was a low credit score, work on increasing it beyond the average level. If the denial was because you do not have enough capital to repay the debt, increase your cash reserves until you get an adequate amount of cash—and so on. In any case, be sure to review the qualifications that the lender imposes for SBA loan applications, particularly when it comes to specific numbers (e.g., minimum credit score, amount of capital, the value of collateral, etc.)
It can take a lot of time until you can strengthen your SBA loan application to at least an adequate level, so be patient. Aside from working on your application, using the time to improve your financial capacity can also help you achieve better cash flow in the future when you finally start your business.
3. Consider another lender
Perhaps the first lender’s qualifications are too high for you, and you are not confident about reapplying to them again even after you strengthen your application. In this case, consider applying to another lender—perhaps an SBA-preferred lender that offers better small-business loans for your specific needs.
However, ensure that you analyze the new lender’s qualifications thoroughly; you wouldn’t want to face the same denial twice. If you feel that you meet the lender’s criteria (especially regarding the numbers), go ahead and apply.
4. Reapply to the old lender
If you don’t want to look for a new lender, you can reapply for an SBA loan 90 days after receiving the denial letter in the mail. Hopefully, this is more than enough time for you to strengthen your reapplication and improve your chances of approval.
But reapplying is not always the best choice. If you are in an industry wherein lenders have lending strict policies, it may be better to find an alternative to an SBA loan. The same goes if you need the money sooner than 90 days.
5. Consider other financing options
If you cannot wait the 90 days or don’t see sense in reapplying, now is the time to consider other financing options. Here are several examples:
- Credit cards. Increasing your credit may not be the best move, but in a pinch, putting business expenses on credit cards is one of the easiest options.
- Venture capital. Venture capitalists offer financing in exchange for a part of your business equity. They are also typically well-versed in business, which means they can offer you valuable expertise apart from financing.
- Personal loan. A personal loan may be easier to acquire than an SBA loan. This is a great option if you need capital fast and meet your chosen bank’s qualifications.
- Invoice financing. With invoice financing, a provider pays money on your outstanding accounts receivable, helping keep your cash flow positive.