Experts Share Their Secrets on Why Small Businesses Don't Get Approved for SBA Loans

As a business owner, you already know that your financial standing can make or break your business. You don't need to be told that a loan is an investment in the future of your business, or that failing to make loan payments comes with serious consequences. These points should all be abundantly clear to you, as someone who has had enough financial acumen to start a business in the first place!

Borrowers make several major mistakes when applying to SBA loans

Still, even the most seasoned of small business owners can face certain stumbling blocks when applying for an SBA loan, such as the increasingly popular SBA 7(a) loan. This is especially the case when business owners are new to the commercial lending process. If you've been bootstrapping it, you may be especially wary of (but excited about) the prospect of borrowing to grow your business.

We wanted to get some perspective from commercial loan officers on the most common mistakes they see business owners making when applying for a loan, so we posited this question to several different lenders -- and the responses were surprising.

Here are the top mistakes most small businesses make when applying for an SBA business loan.

Mistake #1: Forgetting (or deliberately withholding) an itemized list of collateral.

"Bankers are not venture capitalists or angel investors. We are lenders," says commercial loan officer David Vernich. 'We need to take safe, prudent risks with the depositors money to make sure we get it all back plus interest."

One way to get on your future lender's good side? Provide an itemized list of all collateral you're willing to put up to back your loan. Although the SBA does provide a guarantee, it's not for the full loan amount -- meaning the bank is still taking on some risk when loaning you money. The easiest way to quell this concern is to show that you have assets you're willing and able to offer up as collateral, and being completely clear and upfront about their valuation.

And although some borrowers may be able to get away with not including this list, SBA  lending expert Sameer Shah warns against this. “I have seen situations in which the business or the guarantors hid or didn’t report certain assets. While it’s often something they can often get away with, it’s unethical and can be a serious issue in the case of default.”

Mistake #2: Not knowing how much you want to borrow.

It may be tempting to ask for the maximum amount possible. After all, with more money, you can do more for your business...right?

Maybe, but a much better plan is to define your growth goals first, and then determine exactly how much money you need to get there. Not only will this ensure you don't go too deeply into debt, but it'll also reflect really well on you when you sit down with a loan officer.

If you've planned down to the dollar how you intend to use your loan funds, the lender can trust that you're organized and responsible -- meaning you're a much safer risk than Joe Schmo who just wants to see how much he can get.

Mistake #3: Not having adequate cash flow to pay the loan back (or not being able to prove it).

Your books are your greatest weapon when applying for an SBA loan. Vernich says, "for every dollar of debt, we need to see $1.25 of cash flow from the business to pay it back."

Have all of the following, if possible:

  • The last three years' worth of tax returns (business and personal)

  • Detailed current personal financial statement

  • Proof of cash flow or realistic projections

If you have all of these things, says Vernich, "the probability of success jumps ten-fold."

Mistake #4: Not having a down payment of 10% prepared.

Though you may not always need a down payment, it's a good practice to have 10% of the loan amount on reserve to offer up in the event that it's required, says Kensley Lewis, secretary and loan officer at Commercial Loan Solutions.

Mistake #5: Not cleaning up your credit first.

Unfortunately, “a successful business doesn’t negate a poor personal or business credit score,” says Nicholas Straut of Fundera, a large SBA lender based in New York. And if your credit is in good shape, now’s not the time to be taking on additional debts. If you have other debt or credit payments but your revenue isn’t enough to offset it, you’ll have a really hard time getting a loan. “Be honest, prepare thoroughly, and be realistic!” Straut says.

Anything you can do to show your future lender that you're serious about paying back your SBA loan will work in your favor. “Small businesses should understand that the first thing they should provide is numbers -- numbers that can represent that they can pay back the business loan,” says Paul Jennifer, a Merchant Cash Advance expert.

The bottom line? It doesn’t matter if you have a million-dollar idea: what matters to lenders is the actual dollars.