The Small Business Administration (SBA) has been a leading provider of loan applications for small businesses for many years. If you plan to apply for a loan, here are 10 more reasons. These reasons explain why your SBA Loan Application may be declined.
To clarify, technically, the SBA does not process and approve loans; banks and other loan originators do.
They, in turn, receive a guarantee 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.
10 Reasons Loans Are Not Approved
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SBA loans are based on a business’s ability to generate a positive cash flow
- If the business does not have a positive cash flow, the loan will be declined. The demonstration of positive cash flow is provided through the business’s tax returns for the last three years, as well as its current profit and loss statement. If tax returns are unavailable for any reason, the SBA will accept sales receipts; however, this may delay the approval process.
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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.
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If a loan application includes real estate
- This is a plus, as it provides collateral for the bank and SBA to use in helping to offset the risk. Suppose real estate is not part of the loan. In that case, the borrower will need to provide collateral, such as a personal residence or a personal guarantee from someone willing to expose their assets and therefore take on the risk of the loan.
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Different SBA lenders have different criteria.
- When it comes to approving SBA loans, some lenders require a minimum amount to be borrowed of at least $250,000, while others will accept lower amounts. Knowing these limits and applying to the right lender is critical; otherwise, it can delay or derail the deal altogether. See also the option of Seller financing.
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Some loan applications require an environmental report
- For example, loans to gas stations require both a Phase 1 and a Phase 2 Environmental report. The loan application can be delayed if the right environmental report is not available on time.
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The SBA will only approve loans to a borrower who is either a U.S. citizen or holds a legal alien status.
- Documents need to be available to support the borrower’s position.
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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.
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Most Buyer offers to purchase a business include contingencies
- It’s essential that both the Buyer and Seller feel the deal is progressing, so it’s crucial to remove contingencies promptly. This ensures that when the lender’s approval of the SBA finally arrives, the deal is ready to close.
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If the business purchase includes a current lease
- Many lenders require the loan application to include approval from the landlord, who will either assign the lease or provide a new lease that is acceptable to the SBA. Negotiating a lease can be a challenging and time-consuming process in itself; therefore, addressing it sooner is beneficial for all parties involved in the transaction.
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The business’s cash flow may not initially be sufficient for the loan to be approved.
- If the business Buyer/borrower has a spouse who contributes to the family income, the SBA will be willing to accept this as an income source, provided the spouse can guarantee the income. See also: SBA Loan benefits to a Buyer.
Conclusion
The SBA loan application process is not a quick one. Additionally, it’s very formal. An application needs to have all the I’s dotted and T’s crossed. If an application fails compliance, the lender may lose the privilege to accept SBA loans. The lender may also lose the ability to process these loans. Additionally, if the lender underwrites too many loans that go bad, the SBA can and will remove its ability to approve SBA loans.
Further reading