10 Reasons Your SBA Loan May Be Declined

Owning and operating your own business is very much a part of the American Dream. Not everyone is qualified to live this dream but to help qualified buyers, the US Congress through the Small Business Administration (SBA) has put together a third party lending program. The SBA itself does not lend money direct to would be entrepreneurs, rather they allow qualified banks to manage and execute loan programs that meet criteria set by the SBA who will in return, underwrite a portion of the loan to lessen the risk of the banks. The rules are complex and change in reaction to the economy. However, a prospective borrower needs to put their best foot forward or their loan will not be successful. Here are 10 reasons your request for an SBA loan more than likely will be declined.

    1. The SBA requires a Personal Financial Statement from each loan applicant and this document needs to show how much and where the down payment will come from to buy the business. The SBA program requires the buyer to make a capital injection to buy the business; they will not approve a zero down loan.


    1. The SBA wants loans made to citizens with a clean criminal record. If you’ve had a drink driving offense and it goes back a few years, they will require a full explanation of what happened so they can determine whether or not they will underwrite their portion of the loan.


    1. SBA loans are for a business with a positive cash flow. With the loan application there needs to be a business model that shows the cash flow projection of the business, the price and terms of the deals.


    1. If the business the buyer wants to buy includes a lease from a landlord, the SBA loan application needs to show that the landlord has approved a lease for the buyer and the lease will need to correspond to at least the length of the SBA loan. That is, if the SBA loan is for 10 years, the lease will need to be a minimum of 10 years.


    1. One of the major reasons for an SBA loan not being approved at the moment is due to the buyer having insufficient industry management experience in the industry the business being acquired is in. If the buyer has extensive management experience but it’s not the same industry then it’s almost certain the loan will be denied.


    1. The business plan and financial cash flow models need to include working capital for the buyer. If the business purchase price is $1,000,000 but the business needs $150,000 in working capital, make sure the loan application shows where the working capital will come from.


    1. When a business is listed for sale it can often be 6 months or more before a buyer comes along and makes an offer. The SBA requires financial statements of a business to be no older than 90 days so the decision to approve a loan is based on current information. The seller therefore needs to keep financial statements up to date if an SBA loan is part of the purchase.


    1. If the buyer’s offer requires the seller to remain as a consultant to the business, the maximum period of time they will accept for the seller to be a consultant is 12 months.


    1. The SBA requires that the buyer have a minimum credit score for a loan to be approved. At the moment the score is 700 but it’s much better if the score is 720 or higher.


  1. There are many banks that offer loans. In addition to banks, there are service providers that process and underwrite loans. Many lenders manage a book of loans often based on a mix of industries they know and have researched to help reduce and manage their risk. As a result, your loan may be declined with one lender as they already have too many loans exposed to a particular industry or in fact, they may not want to lend in that industry.

The Boys Scouts motto is “Be prepared.” If you plan to apply for an SBA loan, this motto will serve you well as it is not a quick process and can be drawn out if you are not organized.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.

Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest credential awarded by the IBBA and the Certified Business Broker (CBB) designation from the California Association of Business Brokers. He also holds a Brokers License with the California Department of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Chair of the Sacramento Chapter of the California Association of Business Brokers.

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