People who need working capital or money to purchase assets can turn to the Small Business Administration (SBA) for assistance with securing loans for the money they need. Unfortunately, it's not unusual for people who apply for these loans to be denied for one reason or another. Here are three reasons this may occur and what you can to do avoid the same problem.
Your Company Is Not Registered as a Business
It's always the small things that catch people off guard. Thus, it's not surprising that many people are denied SBA loans is because they forget to register their businesses. This is particularly common in cases where people work as freelancers or independent contractors under their own names. Since the IRS treats self-employment income similar to wages in many ways, these people may not realize they should take time to register their business to enjoy the protection it can provide.
Registering a business can be a simple process, depending on your goals. The simplest form of registration is as a sole proprietorship, which can be done by simply registering a DBA (doing business as) with the Secretary of State in the state where you live. If you want to protect your personal assets from your business liabilities, then you should consider registering a LLC or corporation. It's best to consult with a business attorney who can help you determine which business structure best serves your needs and preferences.
The Business Doesn't Have Enough Collateral
Your application for an SBA loan may also be rejected because you don't have enough collateral to secure the financing. To understand why this would be an issue, it's important to know that the Small Business Administration is not a lender. Instead, this agency guarantees loans furnished by banks. Essentially, the SBA acts as a co-signer who will pay the bank if the business owner defaults on a guaranteed loan.
However, the SBA may not guarantee the entire amount you're requesting. For instance, the agency will only secure up to 85 percent of loans that are $150,000 or less. That still leaves 15 percent of the loan unsecured. If your assets aren't valuable enough to cover that amount or your credit score isn't high enough that the bank would be willing to take the risk and approve the loan, then your application may be denied.
The easiest way to avoid this issue by looking for a lender that don't require collateral to secure the loan. Alternatively, ask for the least amount of money possible. The more money you ask for, the bigger the loss the bank will sustain if you default. Thus, the bank may be willing to approve you for a $25,000 loan because the amount it stands to lose is relatively small ($3,750) but take issue with a $100,000 loan, where the stakes are significantly higher (a potential $15,000 loss).
External Factors Increase the Risk
A third issue that may tank your SBA loan application is that external forces may make the lender feel that extending credit to you is too risky. This doesn't have anything to do with you or your business specifically; rather, social or economic forces make it appear your venture would have a difficult time making money, which would affect your ability to pay.
For instance, imagine you want to open a pet store. However, the state just passed a law requiring all pet stores to only sell rescue animals. Since most people prefer to have baby animals (e.g., puppies, kittens), the bank may feel this would have a negative impact on your profitability and decline to provide financing.
It can be challenging to overcome this issue, but your best bet is to research industry trends and ensure your business proposal accounts for as many potential issues as possible. This can help allay the bank's concerns and help you get the loan.
To learn more about SBA loans or apply for one, contact a local lender.