5 Reasons Why You May Not Qualify for an SBA Disaster Loan

Ezra Cabrera

Updated: January 2, 2019
sba diaster loan requirements

In addition to any insurance coverage, they might have, business owners and individuals alike that have been affected by a declared natural disaster, can apply for an SBA disaster loan. SBA disaster loans are designed in a way that enables small business owners and individuals to recover from a natural disaster without the occurrence of financial hardships. What’s attractive about these loans is, they come with both low-interest rates and long repayment terms.

With that in mind, here are the top 5 reasons that your business might not be eligible for an SBA disaster loan.

Previous Borrowing History

Many business owners and individuals have borrowed from lenders, credit card companies, or even the SBA in the past. The borrowed funds were used for a variety of purchases, such as a car, a home, with numerous more using their credit cards to pay for day to day expenses. All lenders check your personal and business credit scores. If you have any previous defaults, modifications, or have shown an inability to pay previous creditors, the SBA is probably going to deny your application for a loan.

Entity Type 

In order to qualify for an SBA disaster loan, your business must be operating for profit entity. If your business is registered as either a publicly-traded company, a non-profit entity, or a foreign registered entity, this status will automatically make you ineligible to apply.

Business Credit Score

The SBA requires you to have a strong credit score – at least 600 in order to qualify. There’s a high risk of being denied an SBA loan if your credit score is low. However, there are other lenders that don’t mind a low score and your business will still be able to have a more holistic evaluation process.

Personal Credit Score

Although the SBA disaster loan programs are designed to help business owners and individuals who need financing, if a company or individual is considered a sub-prime candidate and has less than a 660 FICO score, they will also be ineligible for an SBA disaster loan. Demonstrating your ability to pay back a loan to the SBA is a crucial part of the underwriting process.

Available Collateral

In addition to having an above-average credit score, the SBA will require collateral for an SBA disaster loan. This is similar to many of the programs they offer to small business owners, such as the SBA 504 and SBA 7(a) loan programs.

Refusing to Guarantee the Loan

By guaranteeing a loan personally, you become responsible for paying the loan back even if your business closes down. A personal guarantee enables lenders to sell your assets to pay for the loan. If you refuse to guarantee the loan, lenders would most likely disqualify you for an SBA loan.

Historical Cash-flow

Your personal credit score will show the SBA that you pay your bills in a timely fashion. By looking at the historical cash-flow of your business, the SBA will be able to determine if you are in a position to support additional debt on a moving forward basis. Typically, they will look at your ability to service debt through a debt service coverage ratio, or a DSCR. The minimum acceptable DSCR over the previous 3 years will be in the 1.10 to 1.15 range. The higher the number, the stronger the cash flow. A historical cash-flow analysis is the best way to determine what the future cash-flow of a business will look like.

Industry Type

Let’s say you have what it takes to qualify for a loan – enough collateral, high credit score, and several years in the industry. You can still get rejected if your industry is ineligible for an SBA loan. Industries such as life insurance companies, lobbying organizations, certain franchises, and certain types of health businesses, among others.

Final Thoughts on SBA Disaster Loans 

When applying for any type of business loan, including disaster loans, it’s important to have all your financial and operational documents ready. It’s also better to have an updated business plan to make it easier for you to gather paperwork. Additionally, you can business plans as a management tool to track the health of your company finances.

If you’ve been denied a loan, it’s important to know why you got rejected in the first place. In this way, you’ll know what you need to work on. For example, if you have a low credit rating, you can improve it by paying your bills on time and/or establish credit with your suppliers. You can try to reapply for a loan once you’ve rectified the situation.

To learn more about the disaster loan program, click here for an in-depth overview of the different types of SBA disaster loans that are available to both individuals and small business owners.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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