SBA Loans are the most highly-coveted small business loans in the market, as they offer high loan amounts at lower rates and long repayment terms. The downside is that they’re extremely hard to qualify for. You need to have a stellar business credit and financial background to get your foot in the door. The steep eligibility criteria can be intimidating to small business owners, which is why it can be daunting to apply.

While it can be discouraging to get your bakery’s SBA loan application rejected, there are ways to improve your chances of qualifying in the future. Knowing the common reasons for rejections is the first step in positioning your business for approval. We’ve outlined the seven most common issues below.

1. You have a low credit score

Credit scores are key to getting business financing. And, the SBA is going to look at both your personal and business credit reports and scores. In both instances, credit scores serve as a testament to your creditworthiness. Lower credit scores usually translate to poor repayment behaviors or lack of payment history. On the other hand, higher credit scores are considered creditworthy, and businesses with these scores have better chances of qualifying for business loans. While the SBA themselves doesn’t set a specific credit score requirement, lenders, especially banks, prefer lending to businesses with excellent ratings. 

2. You’re in the early stages of your business operations

In general, lenders are less likely to approve SBA loans to younger businesses. Considering that only 10% of the startup population survive the first few years, the risk-averse banks may have second thoughts in approving your loan application if your bakery is less than 2 years old. 

Some lenders may still extend credit to startups or those with less than two years of business history. However, they generally expect the owners to have an extensive experience in the field. That means, prior to opening your bakery, you’ve worked at different bakeries or in any field related to baking or food in general. 

Also, if your business is rapidly scaling, but you lack the minimum business history requirement, demonstrating a solid and consistent cash flow during the short time you’ve been operating or showing a high value of outstanding customer invoices may help improve your chances of SBA loan approval. Any proof that your business is doing outstandingly well will help your application.

3. Your business has poor cash flow

On top of your business credit score and time in business, lenders also want to see how your cash flow is doing. You may be required to submit a few years’ worth of cash flow statements during your application. 

By looking at your cash flow, lenders will get a bigger picture of how you handle your bakery’s finances at its best and worst times. Your statements will also show whether you have more cash coming in than out and if there is enough left to meet the loan repayments (if you get approved for the loan) after your expenses. 

So, what does a healthy cash flow look like? Generally, a company’s cash flow is considered in “good shape” if the amount that comes in is greater than the amount that comes out. The more cash the business has after the expenses, the better. If the lenders find out that you’re facing cash flow issues, chances are, they won’t approve your application.  

As mentioned, even if you don’t have years of business history on your sleeve, a healthy and consistent cash flow, even for a few months, can mean the difference between rejection and approval. If your previous SBA loan application was denied due to poor cash flow, take steps to understand what went wrong and correct those mistakes before reapplying.

4. Your business debt utilization is too high or too low

Debt utilization (also called credit utilization ratio) refers to the amount of credit you’re currently using versus the amount available at your disposal. Ideally, businesses must have less than 30% of credit utilization by the time they apply for another credit. 

Businesses with high credit utilization ratios are considered high risk. Banks may not look at them favorably because any credit added to their account may only increase their financial burden and, essentially, their chances of default. 

Conversely, businesses that fail to demonstrate good use of credit may have their SBA loan applications denied. Lenders also want to see that you’re using the credit responsibly and making payments on time. The more responsible you are in repaying your credit, the lesser risk you pose to lenders. 

5. You don’t have enough collateral

Even though the government backs up 80% of the loan, lenders will still want to see some collateral to secure the loan. It’s worth noting that the banks still have 20% invested in the financing. One way or another, they will face losses if your bakery cannot fulfill the repayments. 

In SBA Loans, the collateral will act as an assurance that if your business defaults on the repayments for whatever reason, the SBA and lenders will still be able to recoup some of their losses. With that in mind, if your bakery doesn’t have enough valuable assets to pledge, there’s a high chance that your application will be rejected.

6. You have a history of government loan default

One of the SBA’s imposed requirements on their SBA loans is that the business must have no history of a government loan default. Stafford Loans, Federal Housing Administration (FHA) Loans, and PLUS loans are some examples of loans backed up by the government. If you’ve defaulted on one of these loans or any other federal loans before, you cannot expect lenders and the SBA themselves to approve you of the financing. 

It's worth noting that default is defined as failure to pay the principal amount and interest rate of a loan that has reached maturity. Even if you missed a few monthly repayments, but have paid the loan amount in full before the maturity date, it won’t be considered a default. In that case, you can still apply for an SBA loan.

7. You didn’t submit completed documents

SBA loans are notorious for their extensive documentation and lengthy application process. With your busy schedule as a baker and business owner, it’s easy for some responsibilities to fall into the cracks. Missing documents and information not only causes delays in the application process but it can lead to lenders denying your application altogether.

But don’t worry. Business loan denial because of incomplete documents doesn’t happen immediately. If you missed one document upon application, lenders would typically notify you so that you can hand it in ASAP. However, if you still fail to provide the missing documents within the given period, only then will the lenders reject your application. If you’re applying for SBA loans, be sure to check your phone or email for any time-sensitive communication from the lender.

Preparation is Key

If you’re having difficulty qualifying for SBA loans, you’re not alone. SBA Loans are extremely tough to qualify for, especially if your bakery is a startup. But by keeping the reasons outlined above in mind, you’ll be able to prepare your business for reapplication and boost your chances of approval in the future. 

If you still can’t qualify for SBA loans, other financing options are available. If you have poor cash flow, less time in business, or poor credit and financial background, applying for loans from online lenders might make more sense. 

About the Author - Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.