SBA loan Archives

February 9, 2021June 23, 2022

4 Reasons Your Business’s SBA Loan Application Was Denied

So your application for a Small Business Administration (SBA) loan was denied. Unfortunately, you’re not alone.

If you’re a small business owner, an SBA loan can be a lifesaver, providing you with the funds you need to get — or stay — up and running, offering up to five million dollars for capital and expenses. There are a few different loan types that cater to different types of businesses, including 7(a), 504, and microloans.

The only problem? The restrictive criteria makes it quite difficult to qualify for a business loan in the first place. The approval rate can be as low as 25% at some banks. It’s easy to see why the top reason businesses fail is cash-flow, and 30% of small businesses are forced to call it quits in year two. Understanding why your application was rejected and what steps you can take to secure funding are key to your business’s success.

Reasons your application for an SBA loan was denied can run the gamut from more obvious ones to others that might not be so apparent. Some members of the Hometap team have experienced the small business loan application process firsthand, from both the lending and applicant side, so we chatted with them about the major pain points. Here’s a rundown of the most common reasons for rejection, and what you can do to access the funding your business needs.

1. You Haven’t Been in Business Long Enough

Small business loans can be especially difficult for start-ups that need funding to scale. It’s generally recommended that you have at least three months worth of financial records to share when applying for a loan. According to Hometap’s Senior Sales and Marketing Operations Manager, Olin Nelson, who previously owned a small coffee business, it often takes more than that.

“You really need at least two years of profit and loss documentation, so lenders can get a good picture of your revenue over an extended period of time,” he explained.

Hometap Investment Manager Bryan Barry agrees; during his time in the lending space, one of the biggest reasons he saw applications get rejected was that the applicant had only been in business for a short time.

“Less than three years in business was a cause for rejection,” he shared, adding that it was common for applicants to be rejected from multiple lenders as well. “I’d see business owners who had been rejected three or four times before coming to us,” he said, underscoring the difficulty of clearing these application hurdles. While this is partially related to credit score (as we’ll get into below) your business’ credit or profit history may be too limited for lenders to feel confident, even if your score is strong.

2. You Have Bad (Or Limited) Credit

One of the most common causes for application rejection is a low credit score (this all depends on the specific lender, but 640–680 is a good minimum to aim for). However, you can also run into issues if your credit history — whether personal or business — isn’t extensive enough, as demonstrated above. If you’ve recently declared bankruptcy, this decreases your likelihood of being approved as well. Nelson also warns against buying into advice that glorifies ‘bootstrapping’ — or relying completely on your own personal credit and money to get started.

“A lot of small business resources encourage people to keep financing in-house, open credit cards to get started, and buy initial inventory that way, but this can really hurt your prospects for getting funding,” he explained. “Your debt-to-income ratio is going to increase, and that can have a negative impact when you go and try to get a traditional loan after that.”

3. You Have a Low Capacity for Repayment

If a lender believes that you may not be able to repay your loan for any reason, they may deny your application. This can happen if you’ve already taken out another loan elsewhere, if you don’t have much (or any) business or personal collateral, or if your business revenue or capital appears insufficient to cover the balance of the loan. Previous financial documentation that shows evidence of positive historical performance, as mentioned above, increases the likelihood that lenders will feel confident about getting their money back.

“You really need some money upfront,” said Nelson. “I was denied for five different loans in my first year of business because my capital needs to scale the business grew much faster than the purchase orders I was getting. When you don’t have consistent income history, and a bank is willing to help, they’ll require 20-30% down on a loan. When you’re trying to quickly scale a business, and reinvesting profits, it’s difficult to save the cash you need to qualify, and lenders won’t cover things like employee salaries or operational capital because they’re not asset-backed or profit-generating.”

4. Your Industry Is “Risky” or Otherwise Ineligible

Lenders tend to be more reluctant to take on businesses that fall into categories that they deem to be higher-risk. These can include restaurants, used car dealerships, racetracks, and casinos. Barry added that in his experience, “some construction companies were risky because it can often take them 30, 60, or 90 days to get paid on projects.” Other ineligible industries are consumer and marketing cooperatives, rare coin and stamp dealers, and nonprofits. There are additional restrictions on religious organizations due to the separation of church and state.

What to Do if Your Small Business Loan is Rejected

Reapply

Once 90 days have passed from the date your SBA loan application was rejected, you can reapply if you feel that you’ve addressed the issue(s) that led to the rejection — fortunately, this should be quite easy to find out, as federal law states that you’re legally entitled to a written letter of explanation for the rejection. Common steps include strengthening your personal and business credit score and ensuring that your company’s financials are in tip-top shape. In cases where you were rejected due to limited time in business, your best bet may be simply to wait at least a few months.

Consider Alternatives to a Small Business Loan

If your SBA loan was denied, another route is to think about alternatives to a small business loan. A home equity investment, like those offered by Hometap, can be an ideal option for small businesses whose SBA loan application was denied or who don’t meet the criteria for approval.

While a traditional small business loan may allow you to get a low rate, it may not be the best choice if you’re looking to get funding quickly; the loan process can take up to three months and require a site inspection and hard credit pull, whereas a Hometap Investment can get you funds in as little as three weeks. In addition, there are more restrictions that come along with an SBA loan in terms of the use of funds: while you might be limited to equipment purchases, building renovations, or furniture and fixtures, a home equity investment allows you to use the money for whatever you’d like without these often rigid requirements.

Learn firsthand how a Hometap Investment can help from Massachusetts homeowner Michael M., who used his home equity to expand his business.

While a home equity loan may offer another alternative way for entrepreneurs to access funding, many self-employed homeowners find it difficult to get approved due to the lack of a standard W2.

“Hometap would have been a godsend for my business because of the flexibility it offers,” Nelson said. “With a home equity investment, you can fund that next stage of growth, unlock more channels, and have a reserve of capital when opportunity strikes. When you’re a small business that’s having to pay the debt and interest that comes with a traditional loan on top of already razor-thin margins, it can be a huge challenge.”

See how a home equity investment from Hometap compares to an SBA loan in the chart below:

While it might not be the best fit if you need a large amount of capital, a Hometap Investment offers a shorter funding timeline, no monthly payments or interest, and no criteria on how you spend the money.

See if we’re a fit for your small business needs.

YOU SHOULD KNOW

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

January 7, 2020June 17, 2022

How to Find the Financing Option That Best Fits Your Small Business

If you’re ready to launch or grow your business, the financing options can feel overwhelming. The first step to securing capital is knowing about the best small business loans for small businesses—and the pros and cons of choosing one over the other.

Small Business Administration (SBA) 7(a) Loan

This small business loan program is the main way the SBA, a U.S. government organization, offers assistance to those looking to finance their company. These loans for self-employed individuals and small businesses provide up to five million dollars. While you’re restricted to business uses, you’re able to use the funds for multiple needs, including construction or renovation, working capital, inventory, or the purchase of land, buildings, and equipment.

Within the program are several loan types, with some eligibility decisions made by your lender and some made by the SBA. Loan amounts, terms, fees, interest rates, and more vary by the loan. For example, there are Veterans Advantage SBA loans that come with reduced fees and SBA Express loans that reduce the turnaround time for SBA review, as well as SBA Disaster Loans intended for businesses affected by the COVID-19 pandemic, natural disasters, or civil unrest. You’ll want to find an SBA-approved lender who can help you determine the best option for you.

Pros:

Because the program is backed by the government, it decreases the risk for the lender, making them more likely to work with you once you’re approved.
Decreased lender risk also means you may be able to secure a longer repayment term, resulting in lower monthly payments.
While interest rates vary by loan, they’re often quite low. “For a patient entrepreneur who has her ducks in a row and is willing to go through the process, it’s a lot cheaper capital,” says Bob Coleman, who publishes The Coleman Report, a popular SBA intelligence report.

Cons:

Some lenders put restrictions on how you can use the funds.
You’ll want to make sure if you’re using funds for things like fixed assets (equipment, remodeling) or to hire more employees, that your loan allows you to do so.
SBA loans may take longer than another type of loan — often 60 to 90 days—and you’ll need a full business plan, financial statements, and business licenses, among other documents.
Certain industries— gambling, firms involved with lending, and religious organizations, for example — don’t qualify for SBA loans.

Was your SBA loan application rejected? Read ‘4 Reasons Your Business’s SBA Loan Application Was Denied‘ to learn what to do next.

Merchant Cash Advance (MCA)

A merchant cash advance, also known as a merchant loan, is designed for businesses with credit scores that may have a difficult time securing a traditional loan. Similar to a small business payroll loan, you get a sum of cash in exchange for a share of your future credit or debit card sales that you repay with set withdrawals (plus fees) from your bank account, usually over a period of three months to a year. It can be a good option for those with less than stellar credit, since the potential to pay back the advance with sales is a more important criterion.

Plus, you can get money very quickly; usually within 48–72 hours of application.

“Merchant cash advances are engineered for speed,” according to Brock Blake, CEO and founder of small-business lending platform Lendio. “If your business has an urgent need, such as a crucial piece of equipment breaking or a lucrative opportunity to seize, an MCA will give you quick access to funds.”

Pros:

Compared to your other options, an MCA is fast and requires minimal paperwork.
If your repayment rate is based on a set percentage of your business sales, your monthly payment may be lower if your revenue decreases in a given month.
You don’t have to back an MCA with collateral.

Cons:

Depending how fast you pay it back, you may face massive APR — as high as a whopping 350%.
If you’re paying back with a percentage of debit and credit card sales, you can face higher APR if your sales skyrocket.
There’s no federal regulation or oversight, since an MCA is technically a commercial transaction instead of a loan.
It’s hard to really determine what the MCA will cost you—and if it’s worth the risk of falling into deeper debt.

Crowdfunding Loan

Crowdfunding allows you to set up a campaign online with your fundraising goal and request money for a specific project. Typically, you’ll offer something to supporters in exchange for their contribution. That may be your product or service, or it may be a share of stock in your company.

While there’s no guarantee that your crowdfunding campaign will be successful — many companies have failed to reach their goal — there are also a number of well-known companies like Pebble and Oculus that got their start this way.

“Crowdfunding works for all kinds of companies at all different stages,” says CEO of crowdfunding platform Republic, Kendrick Nguyen. “But the companies that have the most successful campaigns tend to have the largest and most engaged communities behind them — usually of customers or users or other supporters of their mission.”

Similar to crowdfunding, peer-to-peer lending sites like Lending Club help connect established businesses to investors. It works somewhat like a loan in that you’ll pay interest and have a three- or five-year repayment period. However, instead of financing your loan, Lending Club simply services it. The site’s investors choose whether or not to invest in your loan.

Pros:

Some crowdfunding sites allow you to repay investors with products or services instead of with cash.
Depending on your project, there may be fewer barriers to entry and the process is often quicker than traditional loan processes.
It can be a good way to test the market and gauge the demand for your business before building it out.

Cons:

You may face tax obligations.
While you can promote your campaign via your social and professional networks, there’s no guarantee your campaign will succeed — investors aren’t guaranteed.
For some platforms, if you don’t reach your goal, you don’t access the funding.
If your campaign doesn’t get adequate exposure, it may lead you to falsely conclude that there’s not enough interest in your product or service.

Small Business Equipment Loans

If you need an expensive piece of equipment or machinery — for example, manufacturing lines, company cars, or restaurant ovens — you may look into a small business equipment loan. Equipment loans are designed to help you cover the cost of adding new equipment and/or replacing old, outdated equipment that is too costly to repair.

Equipment loans are available through traditional lenders like banks, as well as online lenders. Some SBA 7(a) loans, as well as its 504 loan program, offer loans for equipment. It’s important to make sure that the loan amount and effective period line up with the equipment’s cost and your timeline for its use, so you’re not pressured to pay back the loan too quickly or for far longer than you needed the equipment.

“On one hand, a longer loan term will result in lower monthly payments,” says Tom Ware, senior vice president of analytics and product development at PayNet Inc. “On the other hand, a term that is longer than the useful life of the asset will result in payments still having to be made in the future, after the asset is no longer of value.”

Pros:

Often better rates compared to other loans.
Tax benefits, like deducting the interest you’ve paid and claiming depreciation.

Cons:

Some lenders may require you to have been in business for a set period of time before offering this type of loan and will likely want to see cash flow statements.
Your equipment serves as loan collateral, so you can lose it if you default on the loan.

If the equipment you need will likely become outdated fast, you may find leasing is a better option. The Equipment Leasing and Finance Association recommends leasing only if you plan to use the equipment for three years or less. You likely won’t need a down payment, either, so this can be a good choice if capital is tight.

Looking for Options Specific to Your Business? Read: The Best Small Business Loans for Niche Entrepreneurs

Using Your Home Equity to Fund Your Business

If you are a business owner and a homeowner, you have an additional option: Tapping into your home equity. Many business owners think twice about options like a home equity line of credit because there is the possibility of losing your house. This is particularly true if you’re just launching a business, as there’s no guarantee it will take off.

But a home equity investment can give you the capital you need now in exchange for a share of the future value of your home. Since it’s an investment, not a loan, you have no monthly payments or interest. Once the term is up, you can either buy out the investment or simply repay it when you sell your home.

No matter what option you use to start or grow your small business, you’ll want to carefully weigh your options and get the help of an expert to make sure you’re choosing the one that will best position you for personal and professional success. Use the chart below to weigh your options.

Take our quiz to see if a home equity investment is a good fit for you and your business needs. It takes less than five minutes to complete and could provide up to $400,000 in cash in as little as three weeks.

YOU SHOULD KNOW…

May 31, 2019June 22, 2022

6 Tips to Help You Get Out of Business Debt—Fast

Running a small business is expensive. Really expensive. You need to bring in enough cash to not just cover your staff’s salary but also to pay for everything from cleaning the office to purchasing inventory.

To accomplish all of this, some business owners find themselves taking out loans or tapping into their business line of credit. There’s nothing wrong with taking on some debt to grow your business, but the sooner you pay it off, the sooner your company’s financial standing and revenue improves.

Here are six tips to help you get out of business debt—fast!

1. Make a New Business Budget

Start by taking a cold hard look at your business’s current financial situation. For many small business owners, what feels like insurmountable debt is actually disorganized income. There may be opportunities with your current cash flow to move money around and pay off your debt faster without spending more money each month.

2. Cut Back on Spending

As you dig into your new budget, you may find opportunities to cut back on unnecessary expenses. To be clear, we don’t suggest you stop investing in your business. Instead, it’s a matter of reducing your overhead so you can focus more on paying off debt. For example, do you buy your team lattes each morning? Instead, invest in a fancy coffee maker for the office. You’re still treating your staff while also cutting back on your expenses.

3. Start by Paying Off Your High-Interest Debt

After analyzing your budget and cutting back on unnecessary expenses, you’ve hopefully found some extra cash that can help pay back your current debts. Gather all of your statements and take a close look at each loan’s interest rate and minimum monthly payments. Many advisors recommend paying off your high-interest debt first. This is called the “avalanche method,” and it allows you to pay off your debts faster while minimizing the overall amount of interest you pay. Just make sure you can still afford the monthly payments on your lower-interest loans at the same time.

4. Consolidate Your Current Debts

Consolidating your bills can also put you on the fast track to getting out of debt. Combining all of your loans into one payment can lower your overall interest rate. Some business owners also appreciate the simplicity of having to pay only one bill each month.

5. Consider a Loan

While it may seem counterintuitive to take out a loan to pay down your debt, it can sometimes boost your business’s financial standing. As Fit Small Business notes, out of almost all forms of financing, SBA loans typically have the most competitive interest rates and longest repayment terms. However, if you need the cash fast, you may find the process for an SBA loan takes too long or requires too much paperwork.

If you’re a homeowner, you also have the option of tapping your largest financial asset—your home—to get out of business debt quickly. One way to access home equity is through traditional loans, though you’ll want to do the math to see if interest rates, terms, and other factors will help or hinder your financial situation.

What’s Best for You? Learn the Differences Between a Cash-Out Refinance, Home Equity Loan, HELOC, and Home Equity Investment

6. Get a Home Equity Investment

If the thought of taking on more debt or committing to yet another monthly payment fills you with dread, you have options. Homeowners can access their home equity—without taking out a loan, incurring more interest, or dealing with monthly payments. Home Equity Investments, like those from Hometap, give you a percentage of your home’s equity today in exchange for a share in the future value of your home. Since they’re an investment, rather than a loan, it’s a way to grab your equity without taking on more debt.

See how it works.

The tips above can help you get out of debt and start investing in the projects and initiatives that will take your business to the next level. If your business credit score took a ding during the process, no worries. Here’s how to get back on track.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

YOU SHOULD KNOW…