Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.
12 min. read
Updated October 27, 2023
Maintaining your business through the coronavirus crisis has likely led you to cut costs, revise your sales projections, and potentially seek out a loan to help you stay afloat. Luckily, the SBA has created a separate COVID-19 Disaster Loan, with less stringent eligibility criteria and a streamlined application process to hopefully make more funds available for more businesses.
But simplified doesn’t mean assured, and if you recently applied for an SBA Economic Injury Disaster Loan only to have your application denied, it doesn’t have to be the end. Let’s break down the top reasons that may have led to your application being denied and the steps you can take to assure you secure funding on your second attempt.
An unfortunate side effect of the simple application is that you likely didn’t receive a specific answer as to why you were ineligible. And sure the criteria have expanded to allow more people to apply, but that doesn’t change the typical reasons that an application may be denied. Work your way through the following list to see what sticks out as a potential weak point in your application.
Most banks will not issue traditional SBA loans to brand new businesses. They often require that you’ve been in business for a couple of years, or, when do they lend to new companies or startups, they generally expect the owners to have experience in the industry.
For the COVID-19 Disaster Loans specifically, your business had to be up and running long enough to display financials that could prove that you were negatively affected by the coronavirus. This does not mean that you need 2-3 years’ worth of documents showcasing your revenue and cost of goods sold, but you’ll likely need reports that show at least 12-months of financial activity.
Many startups are small, local businesses with hopes of eventually rapidly scaling—but they’re still establishing a track record. Both banks and investors are going to want some evidence that you’re going to be able to repay them. If your business has only been operational for a few months you do have options. Showcasing strong cash flow that fell when the crisis hit or large amounts of outstanding accounts receivable may be enough to help your case. Whatever financial proof you can provide, be sure to include it.
While credit score isn’t referenced as qualifying criteria for a Disaster Loan, there’s a good chance that they’ll still run a credit check during the approval process. To qualify for a traditional SBA loan, you must have a strong credit score—at least 600 for most banks. However, the required value typically depends on which lender you choose and may not need to be as high when applying for a Disaster Loan.
Unfortunately even under these circumstances, if you don’t have great credit, you will most likely not receive an SBA loan. One of the best things you can do is to try and find short-term ways to repair your personal credit score. Money may be tight right now, but if you’re able to pay off even a little bit of debt, that slight bump may give you a better shot at being approved.
In an economic downturn, banks become especially risk-averse and want to protect themselves in the event that a business owner cannot pay back a loan. They’re looking for you to put up some collateral as assurance that they can recover their money, even if your business folds. Even though the SBA backs up to 75 percent of SBA loans, the bank is still on the hook for the other 25 percent.
Moreover, the collateral that you provide is split between the SBA and the bank. So if you cannot collateralize a large part of the loan amount, there’s a good chance that your application will be rejected.
Overextending or underutilizing credit can be a big red flag for lenders. If you currently have outstanding loans or a line of credit that is close to being maxed out, you are seen as a much riskier applicant. On the other hand, if you’ve never taken on debt or don’t have a visible credit history, lenders cannot tell if you’ll responsibly handle a loan. Similar to improving your credit score, if you have outstanding debt, try to pay it down. If you lack an obvious history of responsible debt management, try to start building that up by applying for smaller lines of credit and assuring that you regularly pay it off.
Consistent and healthy cash flow reports, even over a few months, can potentially supplement a lack of long-term financial reports for young businesses. But any hint of cash flow issues may sink your application. Cash flow is one of the first things lenders look at when determining eligibility, which is why one of the recommended documents to include with SBA applications is your previous years’ cash flow statement. They want to understand your burn rate and cash runway to see how likely you are to pay back the loan, and in a crisis, a hit in sales, revenue, and overall cash flow can help prove that you were affected by COVID-19.
But while a change in cash flow around February or March of 2020 proves economic injury, any spotty, negative, or regular slumps found in your earlier financial statements can hurt your chances of being approved. Cash flow management is important at any time, and basically provides a snapshot of the health of your business. In a crisis, this becomes even more important, as it can potentially mean the difference between your business surviving or failing, as well as if you will or won’t secure a loan.
If your cash flow history is inconsistent or mismanaged, take steps now, even in a crisis, that shows an upward trend. Develop cash flow forecasts for the remainder of the year based on your adjusted budget, cut costs where you can to show that you understand the importance of effective cash flow management.
As with a lack of collateral, some traditional lenders may be less likely to approve loans if you operate in “risky” industries. Retail, restaurants, real estate, and lending services are just a few of the possible business types that may experience greater difficulty in securing a loan. However, showcasing strong pre-crisis financials, a thorough business plan, and being a specialist in your industry can help make this issue a moot point.
Aside from risky industries, there are also those that are excluded from SBA loans, no matter how good the rest of your application is. Excluded business types include life insurance companies, lobbying organizations, certain types of franchises, cannabis-based businesses, certain types of health businesses, and more.
There are two reasons why asking for a larger loan may help you avoid having your application denied. First, banks and other lenders tend to prioritize larger loans when there is a large influx of applicants. Second, if a requested loan is below a certain amount, depending on the size of the lender, the cost to service that loan is too high to make it worth it for them. Now it won’t be as simple as just asking for a larger sum, you need to be sure you have enough collateral and viable need represented within your financial statements that warrant the updated sum.
One of the easiest things you can do that leads to your loan being denied, is simply submitting an incomplete application or not providing all of the necessary supporting documents. Thankfully the COVID EIDL application has been streamlined to a simple online form, making it much more unlikely that you’ll submit an application without all the necessary info.
But, depending on who your lender ends up being and the strength of your initial application, they may require several additional documents to process the loan. This is where you can miss something when applying. Maybe the lender wasn’t specific enough or you simply forgot to include a specific part of your P&L statement from two years ago that really rounds out your application.
It benefits you to double-check everything before submitting, and if you don’t have the time to pull these documents together manually, signing up for a business planning tool like LivePlan can help you simplify the process.
Like all loans, the SBA EIDL option has its own requirements and specifications that make your business eligible. You’ll want to check if you fall within the requirements and that there are no additional documents or application materials necessary for this specific loan. You can find the current eligibility criteria and necessary documentation for the SBA EIDL loans here.
Possibly the biggest wildcard of the EIDL application process is how well you frame up your story. If you don’t effectively communicate the negative results of the coronavirus crisis on your business and also fail to back it up with data, you likely won’t receive a loan. Thoroughly explain your situation and provide absolute proof that your business is struggling due to the virus. This can be as simple as comparing sales and revenue year over year, noting that you had to close your doors to comply with social distancing or even that your Accounts Receivable have grown simply due to customers being unable to pay.
The more convincingly you explain your situation and the more factual information you have to back it up, the more likely that you’ll be approved.
Once you’ve gotten a better idea as to why your loan was rejected, its time to move forward. Follow these next few steps to reapply.
If you think your loan was denied for unnecessary reasons, you can submit a request for reconsideration to an SBA Disaster Assistance Processing and Disbursement Center (DAPDC). You have up to 6-months after receiving the original denial to submit your appeal and must include documentation that supports your reasoning for the appeal.
This is also an opportunity to submit updated business and financial documents as well as any additional supporting information that might help your case. If your appeal is then denied, you then have the option to appeal directly to the Director of the DAPDC, who’s decision is typically final, or circle back and submit a new application.
You likely did this already when determining why your original loan application wasn’t approved, but it doesn’t hurt to check again and see if you missed something. Maybe your business doesn’t actually qualify or a specific document is buried in the requirements, whatever the case it’s best to check again before reapplying.
Finally, the moment has come to prepare your application once again. Gather and update all the necessary documents, and complete the loan application. Focus on the potential reasons why your application was denied and be sure to provide additional supporting documents that strengthen those sections. If you can, try to chat with your lender to get a better understanding as to what went wrong the first time before you submit again.
If the reason you were denied is too difficult to overcome or you’d rather not reapply for the Disaster Loan, there are some alternatives to consider.
Maybe the lending agency you chose wasn’t the best fit for your business, financial situation, or a number of other reasons. Instead of throwing in the towel or reapplying, you can explore other approved lenders that may be a better fit. Maybe a fintech agency with fewer restrictions or working with a local bank or credit union would give you a better chance of being approved. There are plenty of options available that qualify as Disaster Loan lenders, it may just take a bit of research on your part to find the best one for you.
If you don’t qualify for an SBA Disaster Loan you may want to explore other funding options. PayPal Working Capital, Intuit, Fundbox, and Behalf are just a few of the fintech organizations that provide alternative financing alongside your local bank. Just keep in mind that the qualifications may be relaxed but you may need to supply greater collateral or work with a higher interest rate.
You should be revisiting your forecasts regularly even if you’re not applying for a loan. By doing so you may find alternative cost-cutting solutions that don’t require outside funding or develop more thorough financial forecasts that help represent your business with future applications. In any case, the more often you work through, revise, and test different scenarios the less surprised and more prepared you’ll be to handle uncertainty.
When you apply or reapply for a business loan, even a disaster relief loan, having clear financial and operational documents is important. If you keep your business plan alive and current, it will help you avoid putting these together on the spot. You’ll also be able to use your business plan as a management tool to track the financial health of your business.
If you’re struggling to improve your loan application and find the idea of writing or updating your business plan to create supporting documents to be a daunting task, you may consider trying out LivePlan. It’s business planning software that walks you through a step-by-step planning process and is equipped with automatic financials that don’t require complex spreadsheets or formulas. In uncertain times, such as these, you’ll be able to easily run multiple forecasting scenarios to better track your actuals against your business plan, and get the insights you need to make smart, strategic decisions.
Learn how the team at Palo Alto Software developed this living business planning tool with small businesses in mind during the last economic recession.
While we recommend using a tool like LivePlan to make business planning simple, we also have plenty of free resources to help you get started:
How to Write a Business Plan: Writing a business plan doesn’t have to be difficult. Jump into writing your business plan today with our step-by-step guide.
Download a Free Business Planning Template: Start writing your business plan with our investor approved business plan template.
500+ Sample Plan Library: Unsure of where to start when updating or writing your business plan? Check out our library of over 550 industry-based sample plans for a better idea of what’s required for your specific business.