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The Small Business Administration (SBA) loan programs offer financing that is affordable and borrower-friendly to business owners like you.
Not everyone who applies for an SBA loan will qualify. At Business Funding Group LLC (BFG), we are experts in SBA loans and will help determine your business’s likelihood of approval.
We know as a business owner, you do not have time to waste. We also know that only about 10 – 20% of businesses who apply for an SBA loan directly through a bank get funded. So knowing what can disqualify you from getting an SBA loan will save you time and resources.
In our experience, the eligibility requirement that is the most important when applying is that businesses must be creditworthy and demonstrate a reasonable ability to repay the loan.
The Most Important Factors that Can Disqualify You
Understanding what can disqualify you from getting an SBA loan can save you valuable time and effort. Here are the most important factors to keep in mind.
Creditworthy: Poor Credit Score or Credit History
Your credit score and credit history is used by a lender to determine the likelihood of you paying them back – making it one of the most important metrics to qualifying.
The SBA itself does not dictate to its lenders what personal or business credit score makes someone creditworthy, leaving it up to the lender to decide. Lenders typically like to see applicants with a personal credit score of at least 700.
In reviewing a credit score, lenders often focus on specific areas that are affecting your score. There are multiple factors that can be affecting your score, but in the banks mind they are not all equally “bad”. For example, high utilization of credit is not necessarily a bad thing, while a lot of late payments are.
In a conversation with us, we can help determine if your credit score will be sufficient for a loan, and if not, suggest ways to improve your score.
Credit history
If you, or your business, have any liens, judgments, bankruptcy filings or pending litigations going on this could be a hindrance. But talk to one of our experts and we will be able to assist you.
The most challenging thing for a lender is a history of a bankruptcy. This is because borrowers who have filed for bankruptcy once are statistically more likely to file again compared to those who have never declared bankruptcy. Lenders view this as a heightened risk factor, as it suggests a history of financial distress and potential difficulty in repaying new debt.
Ability to repay: Debt Service / Cashflow
SBA defines Debt Service (DS) as “the future required principal and interest payments on all business debt inclusive of new SBA loan”. And for existing businesses, SBA states that the business needs to demonstrate a total debt service coverage ratio, after the SBA loan, of at least 1.15.
As with creditworthiness, the minimum debt coverage ratio a lender sets might be stricter than what the minimum SBA requirements, which is one of the main reasons so many direct to lender SBA loan applications do not end up funding.
Generally, the lenders we work with like to see a debt coverage ratio of minimum 1.25.
For those who are not familiar with a debt ratio, it is basically the formula of how much cash you have available each year to pay back a loan divided by the annual loan payment. So as an example, if you have $200k if cash flow available for a loan and your annual loan payments are $100k you have a debt coverage ratio of 2.
BFG has developed an easy-to-use tool right here on the website to help you determine if you have sufficient cashflow to support a loan. But any online tool will not be able to beat our experts, so please call us and we will help!
Lack of organization
Any loan application involves due diligence on the lender’s part, and because these loans are backed by a government entity this is very true for SBA loans. Therefore poor bookkeeping, incomplete financial records, and a general lack of organization and timeliness in an applicant’s responses to a lender will affect the success of an application.
Lack of financial history
Although the SBA allows lenders to borrow based on projections, a lot of lenders do not, as the validity of said projections is extremely difficult to ascertain. The lenders BFG work with need at least one year of tax returns showing a debt coverage ratio of 1.25.
Ineligible Business Size or Industry
SBA loans are meant for small businesses and applicants could be disqualified if their business does not meet SBA’s size guidelines. The guidelines vary from one industry to another, where some are based on the number of employees and others on annual revenue.
Certain business industries are ineligible entirely. Gambling, life insurance, and nonprofit organizations are a few examples of industries ineligible for SBA loans.
Lack of Collateral or Down Payment
If a business owner does not have enough cash for a down payment, if one is required, or is not willing to pledge collateral, you may not be able to get an SBA loan.
Tips to Strengthen Your Application
If you think your small business could be disqualified from getting an SBA loan, work on the following to make your application more attractive to lenders:
- Improve your credit score (700+)
- Optimize your business’s profitability to show that you can afford the loan
- Be organized and have all necessary documentation completed
- Resolve any outstanding legal or financial issues
- Work with a company like BFG to increase likelihood of success
Get Expert Help on SBA Eligibility and Disqualification Questions
Small business owners who are looking to expand their business but are not sure if they are eligible for an SBA loan might be wondering what disqualifies an applicant.
Our loan packaging experts specialize in helping small business owners with their loan applications from start to finish. We can determine your eligibility over an obligation-free phone call.
Do not let eligibility concerns hold you back from applying for a loan that could be just what your business needs to thrive. At BFG, we can help address any potential disqualifying factors and ensure your application is as strong as possible. Contact us.