SBA Loan Denied? Take These Next Steps

You’ve been on pins and needles for weeks. Hoping, wondering what is going to happen to your SBA loan application. 

Then you receive the news: your application for an SBA loan was denied.

With the colossal amount of work that goes into submitting an SBA funding application, it’s normal to feel discouraged. We’re not here to suggest that you should cover up those feelings. 

But like any business owner, you can embrace adversity and jump ahead from the setback.

The good news is that having your SBA loan denied isn’t the end. You can take concrete steps to get the funding your small business (SMB) needs.

In this article, we will explain the best approach for reapplying and options for alternative funding that SMBs can also consider. If you are new to all things SBA, check out our comprehensive guide.

7 Common SBA Loan Denial Reasons

Accepting SBA loan denial is painful—embrace the disappointment, but don’t let it get you too down.

By the program’s design, you’ve already tried to get funding through other lenders but have been denied. And you’re looking for that extra capital to keep your SMB afloat, or even grow.

If that sounds like a tough needle to thread, you’re correct. It is. 

That’s why you need to get as much feedback from the lender as possible. They’re required to provide detailed reasons, but sometimes the details can feel confusing. If they are, feel comfortable to ask specific questions.

In the next section, we’ll cover some actions you can take to reapply, but before that, here are the seven most common reasons that SBA loan applications get denied.

1. Short Business History

If your business has been operating for less than two years, you’re ineligible for an SBA loan. However, even if you’ve been around longer than two years, the lender may feel that you need more time in the market to prove the strength of your business. 

2. Low Credit Score

As an SMB owner, SBA lenders look at both your personal and business credit scores and history. You'll likely get denied if your credit history and score don’t meet the lender’s minimum requirement—you generally need a credit score over 600 to be approved for an SBA loan.

3. Insufficient Cash Flow

You believe in your business’s potential enough to devote time, energy, and resources. However, the lender doesn’t want to set you up for failure by saddling you with a monthly payment you can’t make. You'll get denied if your financial statements don’t show that you’re bringing in enough money to cover the repayment obligation.  

4. Incomplete Application or Documentation

If you submit an application without verifying that you provided all the required SBA loan documents and filled out all the right forms, the lender will likely deny it automatically. This is an extra painful denial reason, because it’s an error that has nothing to do with your creditworthiness or your business’s potential. Make sure to pay close attention when applying. 

5. High Debt Levels

There’s a high likelihood that you’ve already pursued other funding partners, but that credit hasn’t been enough to support your business. If your current levels of debt are too high, that’s grounds for denial. Again, the SBA and your lender don’t want to burden you with payments you can’t make. It may feel unfair, but it’s a standard lending practice based on long-term thinking. 

6. Unclear Business Plan

You’ll likely get your SBA loan denied if you don’t include a thorough business plan in your application. This is based on the principle that a business’s full potential may be revealed in the business plan, especially if your financial statements aren’t showing it yet. A well-written business plan is your best chance to prove what your business is capable of, and why funding will help you get there. 

7. Industry Risks

If the North American Industry Classification System (NAICS) code you used for your application falls in the category of a high-risk business, your SBA lender will deny your application. Your business may fall under several NAICS classifications, and it’s possible that you picked one that is accurate, but also associates you with a high-risk industry NAIC code.

Check out our overview of NAIC codes to learn more. 

Your Post-Denial Response: The Next Right Thing

Once you’ve recovered from the shock and frustration of a denied business loan, it’s time to take action. Here are the next steps we recommend for any small business owner who intends to reapply. 

1. Review the Denial Notification

The lender is required to provide you with the SBA loan denial reasons, in full detail. The SBA may also provide a letter explaining why the application was denied. These notifications will form the basis of your improvement plan. Read them carefully and write down any observations or questions you have.  

2. Seek Additional Feedback From the Lender

SBA loan applications usually go through two separate reviews: first with the SBA lender and second with the SBA. Your best option is to consult with your SBA lender to learn more about why your loan was denied. The SBA may then give you further explanations.   

3. Go Over Your Business Plan and Financials

Once you’ve learned everything that you can from the SBA lender, it’s time to revisit your paperwork and financial documents. Although you can’t alter the numbers to better suit your application—that’s called fraud—you can highlight areas that need improvement.

This could be cash flow, expenses, or how your business plan outlines your plan to improve the fundamentals. It’s a good time to sit with a colleague or mentor and review your situation. 

4. Document the Learnings

Make note of every weakness you find in your business and everything you discover about the improvements you need to make. The SBA website has a comprehensive guide for business owners that will prove immensely helpful. 

Don’t try to read the whole thing in one sitting—instead, highlight the areas most relevant to your business and the areas you need to grow in. Then, commit to regularly studying the guide and making notes about what you’ll change.

5. Plan for Improvement

There’s no sugar-coating it: running a business is more than a full-time job, and if you’re going to get approved for an SBA loan, you will have a brand new list of high-priority tasks. No matter what, do not attempt to blow through the list too fast!  

The basis of your plan should be to make consistent, meaningful improvements over time and document the changes. This gives you an excellent body of evidence to show the SBA lender when you reapply. In most cases, the changes you need to make will strengthen your business and make you a much better candidate for any type of funding, let alone an SBA loan.

How to Improve Your Chances of SBA Loan Approval

Now, let’s get into the brass tacks. There are concrete things you can do to improve how your business functions and looks on paper. 

Build Business Credit

Business credit health plays a big part in SBA loan qualification criteria. There may be negative items that you can’t do much about, but here’s what you can do:

• Regularly monitor and review credit reports for accuracy.
• Pay bills and existing debts on time.
• Reduce credit utilization ratio.
• Consider using credit-building products or services.

And remember, while you’re thinking about your business’ financials, keep a close watch on your personal finances—how you handle them makes a difference.

Reduce Existing Debts

This may sound out of touch, especially since you’re applying for a loan because you’re struggling with having enough funds, but often this is a necessary step for SBA loan application success. And yes, paying down debts is often much harder than it sounds, but you can start by: 

• Paying off high-interest debts first.
• Refinancing debts to lower interest rates.
• Avoiding new unnecessary debts.

You can also look for debt consolidation options and ways to liquidate assets so you can pay down or pay off debts. This will have the added benefit of reducing your monthly debt obligations and improving your ability to manage the additional payments of an SBA loan.

Just be very mindful about debt consolidation, as there are many bad actors out there.   

Focus on Cash Flow

Although The Notorious B.I.G famously claimed “mo’ money, mo’ problems,” he probably wasn’t trying to run a successful business and prove to lenders that he was a creditworthy borrower.

Better cash flow will prove you are a reliable borrower. The following tactics should be your top priorities: 

• Analyze and optimize your billing and collections processes.
• Reduce your expenses and negotiate better terms with suppliers.
• Diversify revenue streams to stabilize income.
• Consider repricing or repackaging your products or services to generate new sales.

By increasing your cash flow, you’ll be able to pay your debts down faster, improve your credit score, and demonstrate the true potential of your business. 

Improve Your Business Plan

Writing a business plan takes a lot of energy and attention to detail. Many SMB owners never write one unless forced to do so by a process like applying for a small business loan. 

Here’s what we recommend when revising an existing business plan: 

• Regularly update your plan to reflect current market conditions and business goals.
• Develop clear, realistic financial projections with contingency plans.
• Seek feedback on your plan from mentors and industry experts.

Use verifiable data when making projections and market assessments.Whatever business plan you submit with your SBA loan application, it’s time to revisit it. You may even consider rewriting your business plan from scratch with the helping hand of third-party subject matter experts. 

Alternative Financing Options SMBs Should Consider

After getting an SBA loan denied, you’ll have to wait 90 days before you can reapply. You may need additional credit in the interim, and options are available. 

First, you should inquire with your SBA lender if they have any additional credit products that you might qualify for. They may even know about small business grants or organizations that help businesses apply for grant money. Grant applications are intense, similar to the SBA loan process, but they don’t have to be repaid, which is a huge advantage. 

Another popular option is a crowdfunding campaign, where you solicit potential customers to pay you in advance for a bespoke product or service. Many companies have successfully used crowdfunding to develop new products and overcome funding challenges for purchasing inventory.

Outside of that, you’ll see options with much higher interest rates or aggressive terms than the SBA loan you hoped for. Many online lenders work with SMBs, and their applications tend to be much easier and faster. 

Alternative financing is another way to help with short-term funding issues. Revenue-based financing and invoice factoring can give you rapid access to funding without requiring the rigorous qualification process of a conventional loan. Be careful though; some forms of alternative financing can put you in a worse situation—only use the most reputable providers you can find.

SBA Loan Denial FAQs

While we covered the basics about what happens when you get your SBA loan denied, you might still have some questions. At Hansa, we’re happy to answer any doubts or concerns you might, but meanwhile, here’s a bit more information. 

1. How long do I have to wait until I can reapply?

90 days. Also, if you applied for an SBA loan before August 10, 2023, you should consider reapplying now. The SBA made significant changes to the 7(a) and 504 loan programs to make the entire process easier and more accessible to more business owners.

2. Will my SBA loan denial appear on my credit report?

Denials for SBA disaster loans do not appear on your credit report. However, applying for an SBA loan does count as a hard credit pull and will appear on your credit report, although any adverse effects should be temporary. 

3. Can I appeal the decision?

Yes, but only for specific denial conditions. The SBA maintains an Office of Hearings and Appeals (OHA) to handle SBA program decision appeals, NAICS appeals, and CVE protests and appeals. If you feel your application was unfairly denied, you can appeal with the OHA. 

With Hansa, Loan Denial Is Just a Step Towards Success

When owning an SMB, persistence might be the most important attribute you can cultivate. 

Although the SBA SBA publishes lots of data on the performance of its lending programs, it doesn’t spell out the total number of applications received compared to applications approved. 

According to the Federal Reserve’s 2024 Small Business Credit Survey, about half of firms that applied for funding received it. That means that getting denied a loan isn’t a poor reflection on you or your business; it’s a reality that half of all businesses face. 

‍The way you respond can set you apart. Will you harvest all the lessons that you can? Will you seek new partnerships to help your business grow?

At Hansa, we’re passionate about supporting small business owners with guidance and resources. You’re not on this journey alone—together with Hansa, you can write a better future for your business.