The coronavirus outbreak has probably resulted in you having to cut costs, revise projections for sales, and possibly take out an investment to help keep your business on the right track. Fortunately, there is a solution for you. SBA has developed a different COVID-19 disaster loan with more stringent eligibility requirements and a simplified application process that will hopefully provide more money to larger businesses.
However, a simplified application doesn’t guarantee a secure loan. For example, if you’ve just applied for the SBA Economic Injuries Disaster Loan but were denied, the application is rejected. However, it doesn’t have to be the final word. Let’s examine the leading causes that could have left your application and how you can ensure you get the loan on your second try.
The reasons that could have led to the Disaster Loan application was denied
A negative side effect of submitting a simple application is that you probably didn’t get a precise reason for the reason you weren’t eligible. It is because the criteria for applying are being expanded to permit more applicants to submit applications. However, it doesn’t alter the reasons why an application could be rejected. Go through the following list to discover what stands out as a possibility of weakness on your form.
1. Your company is entirely new
Many banks do not offer conventional SBA loans to new companies. Instead, they typically will require that you’ve been in operation for a couple of years. Or, when they lend to startups or companies that are new in general, they will require the business owners to have prior experience in the business.
In the case of the COVID-19 Disaster Loans, the company must be operating for a long time enough to show the financials to prove the coronavirus adversely caused you. It doesn’t mean you’ll require a minimum of two years worth of documentation showing your income and costs of selling goods. However, you’ll probably need reports that demonstrate at least 12 months of financial activities.
Many startups are small, local businesses that can grow eventually but are still developing a track record. Both investors and banks will require proof that you’ll be able to pay them back. If your company is operating for a couple of months, there are alternatives. An impressive cash flow that decreased during the crisis or vast amounts of accounts receivable that are not paid may suffice to support your case. Whatever evidence you can offer, be sure to mention the evidence.
2. You have a poor credit score
Although credit scores aren’t used as qualification criteria for a disaster loan, they’ll likely conduct an assessment of your credit when they approve. Applicants need to prove their creditworthiness To be eligible for conventional SBA loans, which are at a minimum of 600 for most banks. The required score is usually contingent on the lender you select and might not be as high for a disaster loan.
In these conditions, if you’re not able to establish a strong credit, likely, you will not be able to get the SBA loan. Therefore, one of the most effective ways to improve your credit score is to look for quick-term solutions to repair your credit score. Your finances may be tight this moment, but if you’re capable of paying off just some of your debt, that small bump could allow you to be accepted.
3. There isn’t enough collateral
When the economy is in a slump, banks become particularly cautious and are looking to secure themselves in the scenario that a business owner is unable to repay the loan. So they’re seeking you to offer collateral to guarantee that they will recover their investment even if the business goes under. Although the SBA can guarantee the majority of SBA loans, the bank is in charge of the remaining 25 percent.
4. A high or low ratio of debt
Credit that is not being utilized or extended is a massive warning for lenders. If you have outstanding loans or a line credit that’s close to being fully utilized and you’re considered riskier a borrower. However, if you’ve never borrowed or haven’t a clear credit score, lenders cannot determine if you’re able to manage the repayment of a loan responsibly. Similar to increasing the credit rating, when are in debt, make an effort to reduce it. If you don’t have a clear past of prudent debt management, it is best to begin building it up by taking out smaller credit lines and ensuring that you consistently make payments to pay it off.
5. Poor cash flow
Even for just a few months, a steady and healthy flow of cash reports could be an addition to a deficiency of financial statements over the long term for new businesses. However, any indication of cash flow concerns could make your application unqualified. Cash flow is among the most important factors lenders consider in determining eligibility. That is why one of the most important documents to be include in SBA requests is your prior year’s statements of cash flows. They will want to know how much cash you burn and your runway to assess your likelihood of repaying the loan.
However, suppose a shift in cash flow in March or February 2020 is a sign of economic damage or damage. In that case, any inconsistent or negative declines in your previous financial statements may hinder your chances to be accept. Therefore, the management of cash flow is crucial anytime and provides an assessment of your company’s health. In times of crisis, this is more crucial since it could mean the distinction between your company succeeding or failing and whether you’ll or won’t be able to secure an investment loan.
If your cash flow history is erratic or poorly managed, make changes immediately, even during a crisis, which shows the trend is upward. Then, create cash flow forecasts for the rest of the year based on the budget that you have adjusted, and reduce expenses where you can, to show you comprehend the importance of a well-organized control of cash flows.
6. Industry that is risky
Specific traditional lenders are less likely to grant loans for those who operate with “risky” industries without collateral. Restaurants, retail real estate, restaurants, and lending are some of the businesses that could face more difficulty getting loans. If you can show solid financials before the crisis, a comprehensive business plan and an expert in your field could solve this problem.
Apart from the risky sectors, other industries aren’t eligible for SBA loans, regardless of how well your other application is. The excluded business types comprise life insurance businesses, lobbying groups and certain kinds of franchises, cannabis-based companies, certain health-related types of companies, and much more.
7. You should request more information
Two reasons are applying for a larger loan can assist you in avoiding being denied. First, banks and other lenders are more likely to approve large loans when they have an influx of applicants. Additionally, if a loan is not in the range of a specific amount, based on how big the bank or the loan’s cost, the loan is not enough to be worth the cost to the lender. It’s not easy to ask for a more significant amount. It is essential to ensure that you have sufficient collateral and a valid need on your financial statements to justify the new amount.
8. Complete application or no documents
One of the most common mistakes you can make to lead to your loan being reject is an incomplete application or not giving all the required documents to support it. Fortunately, this COVID EIDL form has been simplified to an easy online form, making it more likely to apply without providing all the required information.
However, depending on the lender you end up being and the strength of your application, they may require additional documents to complete the loan. So it is when you could overlook something while applying. For example, perhaps the lender was not specific enough, or you forgot to include a particular section on the P&L report from last year, which makes up your application.
It’s a good idea to check everything before submitting it in the first place. And if you’re not able to put these documents together by hand, signing up with software for business planning such as LivePlan will help simplify the procedure.
9. You have violated specific Disaster Loan for Economic Injury rules
Like any loan like all loans, like all loans, the SBA EIDL option has its specific requirements and specifications that allow your business to be qualified. It would help determine whether you meet the criteria and that there aren’t any additional documents or other application documents required for this particular loan: the most current eligibility requirements and the required documents as are necessary for SBA EIDL loans here.
10. It isn’t possible to demonstrate that your business was directly affected by COVID-19
The most significant wildcard in the EIDL application procedure is how you present your narrative. For example, suppose you fail to effectively communicate the negative impact of the coronavirus epidemic for your business, and don’t support it with evidence and proof. In that case, you’ll likely not be eligible for an EIDL loan. So instead, explain your situation in detail and prove that your company is suffering because of the virus. Or perhaps your accounts receivables have increased because customers are not able to pay.
Disclaimer. The opinions and views expressed in this article are the authors Judge Napolitano.