10 Reasons an SBA loan may be declined
The Small Business Administration (or SBA) has been the provider of many loans for small businesses for many years. If you plan to apply for a loan, here are 10 more reasons for your SBA loan may be declined. Just to be a little clearer, technically the SBA does not process and approve the loans as banks and other loan originators do this. They, in turn, receive a guarantee from the to underwrite a portion of the loan thereby helping to mitigate some of the risks of the banks and loan originators. Any small business owner is allowed to apply but not all applications are approved. There are many reasons loans are not approved and here are 10 more reasons why this can happen.
- SBA loans are based on the ability of a business to produce a positive cash flow. If the business does not have a positive cash flow the loan will be declined. The way positive cash flow is demonstrated is via the last three years tax returns of the business as well as the current profit and loss statement. If tax returns, for some reason, are not available, the SBA will accept sales receipts but this will slow down the approval process.
- When applying for a loan, always remember that the underwriter wants to see as much data as possible. This data needs to be up to date. Photographs are a positive way to present the business in the best possible light.
- If a loan application includes real estate that is a plus as it provides collateral for the bank and SBA to use to help offset the risk. If real estate is not part of the loan, the borrower will need to provide some collateral such as a personal residence or a personal guarantee from someone who is willing to expose his or her assets and therefore take on the risk of the loan.
- Different SBA lenders have different criteria when it comes to approving SBA loans. Some lenders require the minimum amount to be borrowed to be at least $250,000 while some lenders will accept lower amounts. Knowing these limits and applying to the right lender are critical otherwise it can delay or derail the deal altogether.
- Some loan applications require an environmental report. For example, loans to gas stations require both a Phase 1 and Phase 2 Environmental report. The loan application can be delayed if the right environmental report is not available in a timely manner.
- The SBA will only approve loans to a borrower who is either a US Citizen or holds a legal alien status. Documents need to be available to support the borrower’s position.
- It’s been mentioned that SBA loans are based on the business having a positive cash flow. However, there are minimum cash flow requirements to have a loan approved. Make sure the business meets these minimum requirements or the loan application may be a waste of time.
- Most buyer offers to purchase a business include contingencies. It’s important that both buyer and seller feel the deal is going somewhere and so it’s important to remove contingencies in a timely manner so that when lender approval of the SBA finally arrives, the deal is ready to close.
- If the business purchase includes a current lease, many lenders require the loan application to include an approval from the landlord they will either assign the lease or provide a new lease that is acceptable to the SBA. Negotiating a lease can be a trying and drawn out event in itself so the sooner this is tackled the better for all parties in the transaction.
- The cash flow from the business may not initially be enough for the loan to be approved. If the business buyer/borrower has a spouse and they contribute a family income, the SBA will be willing to accept this as an income source provided the spouse can guarantee the income.
The SBA loan application process is not quick and it’s very formal. An application needs to have all the I’s dotted and T’s crossed or the lender who has the approval to accept and process SBA loans may have that privilege revoked. Additionally, if the lender underwrites too many loans that go bad, the SBA can and will remove their ability to approve SBA loans. Make sure you have all your documents in order to maximize your chances of getting an SBA loan approved and use the services of a professional business intermediary to help you.