EIDL/SBA Loan Declined? Here's What to do Next.
What to do When Denied for an EIDL or SBA Loan.
An Economic Injury Disaster Loan (EIDL), also known as an SBA loan, is a government backed loan for small businesses facing substantial economic injury due to a disaster. These loans have recently grown in popularity as each of the Covid-19 stimulus packages have set aside funds for SBA loans for businesses incurring losses from the pandemic. Unfortunately, this means they’ve also become competitive and hard to qualify for.
The good news is that those who were denied EIDL grants from previous Covid-19 relief packages are eligible to re-apply and are reviewed with higher priority thanks to the American Rescue Plan Act of 2021 that passed in March.
Whether your application for an EIDL grant was denied before or after the most recent stimulus package, these next steps should help you decide what to do when you’ve been declined for an SBA loan.
Disclaimer: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or business. It is only intended to provide education.
Find Out Why You Were Denied.
The first step you should take when you’re denied any kind of loan is to check why you were denied as that will determine what you can do to move forward. Luckily, your lender is legally required to provide a written letter of explanation with your denial letter.
Ask Your Point of Contact.
Letters of explanation are often vague about why your loan was declined so if you want to know more, you’ll need to reach out to your point of contact.
If your lender is a large bank that’s one of the Small Business Administration’s (SBA) preferred lender partner (PLP) like Wells Fargo or JP Morgan, then your point of contact will likely be a member of that bank. If you filed through a smaller bank, you’ll most likely need to speak with someone from the SBA.
While your lender may have only listed one reason why your loan was declined, the truth is that there are multiple factors that influenced their decision. When it comes to lending credit or loans, lenders will typically look for the “5 Cs” of lending:
Credit – Your business and/or personal credit score.
Character – Your personal record (e.g., bankruptcies, criminal record, previous debt history, etc.)
Collateral – The value of the assets you can offer as collateral.
Capital: – Your business revenue.
Capacity: – Your ability to take on more loans.
Some lenders have strict requirements on one or more of these factors, but others may be more lenient and approve loans if you make up for it in another area. It’s important to understand which criteria(s) your lender focuses on the most before deciding your next step.
Bolster Your Application and Reapply.
There are plenty of benefits to strengthening your SBA application outside of improving your chances of getting the loan approved. Having stronger financial statements is always a good thing.
However, reapplying isn’t always the best option for every business. Businesses must wait at least 90 days* until they can reapply for an SBA loan which just isn’t viable for businesses that need capital sooner than that. Some applications may also be declined for criteria a business can’t change such as their industry or their years in operation.
Businesses that do wish to reapply can try to improve their chances for an approval in a few ways. Usually, the most effective thing they can do is improve the main criteria that disqualified them initially; however, strengthening other qualifiers alongside that is always a safe bet.
*Starting the day your rejection letter was sent, not the day it arrived.
Improving Credit.
An applicant’s personal and/or business credit scores are usually the most impactful factor in a lender’s underwriting process. Lenders will typically set a minimum score for both scores (~ 620 for personal scores and ~140 for business scores), but many will want to see numbers above their minimum.
Improving your credit scores in 90 days can seem challenging, but as long as you pay your bills on time, pay off debts, and use a low amount of the credit available to you, you can easily increase your scores by several points.
Improving Collateral.
Offering valuable collateral is a great way to improve your chances for an approval as it lowers the lender’s risk. For example, some lenders will allow applicants to offer collateral to minimize a down payment. Collateral can also be useful for applicants with challenged credit scores or limited credit history.
Assets such as commercial real estate, inventory, and equipment are some of the most common assets offered as collateral.
Improving Capital.
While lenders will examine your credit score to ensure you have a history of making payments on time, they’ll also want to look at your current financials to ensure that you can make future payments. This usually includes looking at your business’ revenue, debt, and profits.
Just like with improving your credit score, one of the most effective ways you can improve your business’ capital is by paying off existing debt. Outside of that, finding ways to cut expenses and raise revenue – even if it’s just by a little – will go a long way.
Improving Capacity.
Lenders examine your capacity for the same reason they examine your capital: to make sure you can pay off your loan. However, lenders assess your business’ capacity through a less objective lens than they would your capital.
Having a strong business plan that details your business goals and management in-depth will help a lender assess your potential growth. This is especially useful for new businesses that don’t have a long financial history or high profits.
Consider Other Options.
As mentioned above, reapplying may not always be the best choice for some businesses. Thankfully, there are many lenders that cover a wide range of business loans that can provide the funds your business needs.
For example, if you need funds to cover new business expenses such as new equipment, you may be better off applying for an equipment financing loan or lease. These typically have lower requirements and flexible rates, terms, and payments.