Was Your SBA Disaster Loan Denied? Here’s Everything you Need to Know

In a time of economic distress, it can be frustrating to find the right financial support that helps you stay in business. More specifically, if you’ve applied for a small business loan such as an SBA disaster loan and it was denied, where do you go from there?

If you’ve recently had your SBA disaster loan denied, we’ve created this guide to help you move forward. We’ll uncover the different reasons why your application may have been rejected, detail the steps you can take to re-apply, and highlight alternative options you can consider getting funding.

Key Takeaways

  • There are a number of reasons why your application for an SBA disaster loan is denied. This could mean your paperwork needs a rework, your credit score is not high enough, or your business industry is too risky to invest in.
  • When applying for an SBA disaster loan, make sure that you’re working with a lender who specializes in your industry and business size.
  • If your SBA disaster loan got denied, you can appeal it to the SBA. We provided steps on what you can do to appeal a denied loan.
  • Having your SBA disaster loan denied won’t necessarily affect your credit score. This will not be recorded in your credit report.

Why Was Your Application for an SBA Disaster Loan Denied?

There’s a myriad of reasons why your application for an SBA disaster loan (or any loan) may be rejected. More common reasons are if you have poor credit or a poor credit history, your business lacks sufficient income, or has an excessive debt-to-income ratio.

A denial could also have to do with the current economic landscape. A new Bankrate poll of about 4,000 adult respondents revealed that 21% of U.S. consumers have been denied for a loan during the COVID-19 outbreak because the borrower’s credit score is too low. The study pointed out that, “lending standards have tightened in 2020 due to the pandemic and related economic uncertainty.”

If your lender didn’t provide you with the exact reason why your application for an SBA disaster loan was denied, we’ve lined up the most common reasons why it happens.

1. Your Paperwork Needs Further Clarification

If you are a new business owner and you haven’t applied for any funding in the past, it can be challenging to fill out all the necessary paperwork to get your application rolling. One of the most common reasons you are denied an SBA disaster loan is because you failed to complete the required documents, the information you provided needs further clarification, or you haven’t completely filled out the necessary forms.

The truth is, the SBA small business loan application is a long, tedious process and it’s understandable that a new borrower may have a hard time filling out all the necessary paperwork completely and accurately.

To give you an idea, most lenders and banks will ask for a business plan, at least three years’ worth of your business and personal tax returns, bank account statements, financial projections for your small business, as well as your personal and business credit reports.

In some cases, lenders will ask for additional documentation like legal documents–contracts, permits, licenses, patents, etc. to prove the legitimacy and trustworthiness of your business.

If you were denied and are applying a second time, we recommend double-checking the requirements you previously submitted to see if you missed any documentation that’s crucial to your application. You can also inquire with the SBA’s office directly to ask for the necessary documents and avoid having your application denied again.

2. You Don’t Have a Favorable Credit History

For small business owners, the need to maintain an outstanding personal and business credit never goes away. Lenders use this information to evaluate your small business loan application and determine your creditworthiness.

According to the National Small Business Association’s “Small Business Access to Capital Study,” 20% of small business loans have been denied due to business credit.

A more alarming stat, found in the Nav American Dream Gap Survey, is that 45% of small business owners didn’t even know they have a business credit score, and 72% did not know where to find information about it. Even more, 82% had no idea how to interpret their business credit score.

To understand this better, let’s use your personal credit. Your personal credit history is a reflection of how you handle your monthly payment obligations – from credit card debts to bill payments. In turn, this gives lenders an idea of how you’ll be managing the SBA disaster loan you’re applying for.

If you don’t have an appealing credit history, you won’t get a positive credit rating. Take note that when applying for an SBA disaster loan, you need to have a credit score of at least 620. Of course, you have to go beyond that if you want to increase your chances of being approved soonest.

3. You Have No Collateral to Offer

Collateral assets are those that are owned either by you or your business. It serves as your lender’s security in the event that you are not able to pay back your loan.

By definition, the U.S. Small Business Administration (SBA) refers to collaterals as, “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.” Collateral is important to reassure the bank or your preferred lender that they will either be repaid by you or that they can recoup the money you borrowed in any other way that benefits them.

If you are applying for an SBA disaster loan of at least $25,000, you will be required to show collateral to guarantee it. Collaterals can be in the form of property such as real estate, but they can also be represented by your business’ cash savings, equipment, account receivable, or inventory.

What happens if you don’t have collateral to show? Unfortunately, collaterals are required especially if you are applying for a larger SBA disaster loan. If you don’t have sufficient collateral to offer, you can opt for federal grants as another funding option to help you sustain your business during these difficult times.

4. Your Industry is Too Risky

The pandemic has effected virtually every industry, causing businesses of all kinds to pivot their operations and adapt to the effects of lockdown and safety measures. That said, some industries have been more affected than others.

In a comprehensive article published by S&P Market Intelligence, it was revealed that five industries have beem most affected by the global economic crisis: airlines, oil and gas drilling, restaurants, auto parts and equipment, and leisure facilities. This means that if your business belongs in any of these industries, you may have a hard time getting funding for your business.

Other industries are always considered to be high-risk for lenders and banks, like gambling, restaurants, and tech startups.

If you believe the reason your SBA disaster loan application was denied is because of the sector you belong in, do the research to find lenders who specialize in your industry. Ask them what supporting documents you can provide to prove the trustworthiness of your business.

5. Your Debt Utilization is Neither Too High Nor Too Low

Usually, lenders expect borrowers to use no more than 30% of the total credit given to them. In most instances, lenders will consider you to be overextended if you’ve used more than that requirement, and they might be concerned as to whether or not you’ll be able to pay them back before it’s due.

Here’s an example: if you were given an $80,000 line of credit but you have already consumed $70,000 of the funds, you may be considered a higher risk. Take note that all your financial decisions will be reflected in your credit history, and your new lender will be able to see them.

On the contrary, underutilization of your funding or the absence thereof can be also detrimental to your new loan application. A lack of a credible payment history or credit usage does show you have no past debts, but it also gives lenders no basis to show your repayment diligence.

Furthermore, you should have credit variation. If you are applying for an SBA disaster loan, make sure your credit history includes your previous payments for business credit cards, lines of credit, personal loans, and other credit sources. Diversifying your sources of credit gives lenders a better picture that no matter what type of funding you get, you are sure to pay it off responsibly.

6. Your Business Doesn’t Show a Healthy Cash Flow

Your business’s cash flow is the net amount of cash or cash equivalents that go in and out of the business. Lenders typically assess your cash flow to gauge if your business is doing well enough to cover all your expenses.

Having a positive cash flow is attractive to lenders, banks, and investors because it means that you have strong financial flexibility. If your cash flow shows poor financial management, it could raise a red flag to lenders.

Having poor cash flow means that your business fails to increase your liquid assets, cover monthly obligations, return money to shareholders, stay on top of expenses, and have enough of a financial cushion during emergencies. If not mitigated early, poor cash flow might result in business failure.

How to Appeal Your Denied SBA Disaster Loan

If you believe you’ve been wrongly denied an SBA disaster loan and you wish to appeal, you can do so. Now that we’ve covered the different probable reasons why you’re SBA disaster loan was declined, you have a broad idea of where to improve or where to start fixing the problem.

The first step is to send a request for reconsideration to an SBA Disaster Assistance Processing and Disbursement Center within six months after you have been denied an SBA disaster loan. If you don’t make an appeal within this timeframe, you will need to submit a new application.

What should you put in your appeal after being denied an SBA disaster loan? Your appeal request should state the reasons as to why you think your SBA disaster loan application should be reconsidered. Also, it helps to provide a more recent business financial statement with your appeal.

To avoid having your application denied a second time, you will need to appeal directly with the director of the DAPDC and discuss why you need the loan and why you can be trusted when it comes to repaying it back.

If you still fail to get a nod from the director, more often than not that decision is final. But don’t worry, this appealing process doesn’t mean that you won’t ever be given an SBA disaster loan again. You can wait six months and re-apply.

If you still fail to get a nod from the director, more often than not that decision is final. But don’t worry, this appealing process doesn’t mean that you won’t ever be given an SBA disaster loan again. You can wait six months and re-apply.

In some instances, you’ll get an adverse action notice

In some cases, you’ll receive an Adverse Action Notice, which is a letter that details the reason why the lender denied your application. This notice typically tells you whether you have been denied an SBA disaster loan due to your credit score, or if the information you provided in your application form is incomplete.

This letter should provide all the details leading to your denied application as well as the risk factors that contributed to that decision.

Assuming that a credit report contributed to the lender’s decision to deny your application, the notice must specify the source of the credit report information and should provide an explanation of your rights. It should also include the date your credit score was calculated, as well as the range of desirable scores you need to reach to be granted a loan.

What would a good letter of reconsideration look like?

If you’re ready to appeal, it’s important to write a good letter of reconsideration. Below is a basic sample.

Attention: SBA Disaster Assistance Processing and Disbursement Center

Good day! I would like to request a reconsideration of my SBA disaster loan application No. [EIDL APPLICATION NUMBER] for my business, [BUSINESS LEGAL NAME]. The application was denied due to [DENIAL REASON BASED ON THE ADVERSE ACTION NOTICE].

I believe I should be reconsidered because [EXPLAIN].

Attached to this submission are my supporting documents:


Thank you for your consideration. Please let me know if there are further necessary actions I need to comply with in order to proceed with my application.

If you have any concerns or questions, I am available anytime by phone or e-mail at [PHONE / E-MAIL].

Yours Truly,


How Long Should You Wait After Appealing for a Denied SBA Disaster Loan

Timelines will vary depending on the complexity of your application and the documents you’ve submitted. The SBA can get back to you between two weeks and several months, so you have to be patient. You can also follow-up with the office every once in a while to keep yourself updated on the status.

Will a denied disaster loan application affect your credit score?

Most small business owners don’t apply for an SBA disaster loan or any other financial support because they fear that having a denied loan application will negatively affect their credit score.

When banks and lenders do a hard inquiry, this process is added to your credit reports. A hard inquiry means that lenders perform a comprehensive assessment of the risk you pose as a borrower before approving or denying your application. Why wouldn’t a denied loan application be recorded as well, right?

Luckily, a denied SBA disaster loan application (or any other form of financial assistance) will not be recorded in your credit reports. The inquiries performed by lenders will be there, but not the decisions made.

Even hard inquiries will go away in your reports after two years, and even if it does affect your overall credit score, it only affects a small percentage – 10% to be exact.

Credit reporting agencies are not notified about the decisions lenders made on your application, so companies like Experian cannot maintain a record of credit approvals or denials. However, lenders who will be assessing your credit report may see what other companies looked into your records for lending purposes.

One thing you have to remember is that the more inquiries performed on you in the past, the higher risk you become to lenders.

With a Denied SBA Disaster Loan, What Else Can You Do?

We’ve listed other ways you can get funding for your small business.

1. Apply for a FEMA Grant

If you tried appealing the decision for your denied SBA disaster loan, the most popular step is to get access to FEMA Grant Funding.

What is FEMA?

The Federal Emergency Management Agency (FEMA) is a government body that aims to “support the citizens and first responders to promote that as a nation we work together to build, sustain, and improve our capability to prepare for, protect against, respond to, recover from, and mitigate all hazards.”

The organization provides a foundation for individuals to face adversities and recover from devastating disasters.

What is a FEMA Grant?

FEMA Grants are made available for qualified individuals for pre- and post-emergency or disaster-related projects. If you have been denied an SBA disaster loan, FEMA actually encourages you to apply for a grant. In fact, your appeal has to be formally denied to be eligible for any FEMA grants.

Your lender might even refer you directly to applying for a FEMA grant as soon as your application for an SBA disaster loan is denied.

Some of the disaster-related expenses that a FEMA grant can cover are your medical expenses, annual fund for planning and projects, earthquake insurance, floor damage reduction, facility retrofitting, cybersecurity, and sheltering..

Your lender might even refer you directly to applying for a FEMA grant as soon as your application for an SBA disaster loan is denied.

How to Apply for a FEMA Grant

Here’s a step-by-step guide to applying for a FEMA grant, according to the organization’s website:

  1. Find a grant that suits your needs.
  2. Read through FEMA’s eligibility requirements and application process.
  3. If the grant has a cost to share with the applicant or recipient, evaluate if you can afford it.
  4. Determine your applicant type (ex. state or non-state, applicant or sub-applicant).
  5. Complete a benefit-cost analysis.
  6. Submit your application.

2. Check Back Your Lender’s Requirements

Lenders each have their own specializations. Some lenders can back you up if you’re in the restaurant business, while the others can provide you expert advice if you’re a start-up company.

Double-check your current lender’s requirements and see if you’ve missed any information that led to your denied SBA disaster loan application. At best, you can ask your account manager to assist you in going through all your requirements and finding ways to complete them or make them more credible.

3. Find Other Types of Funding that Will Meet Your Needs

If you need cash quickly and you can’t wait for the SBA to get back to you with your appeal, it’s best that you start exploring other funding options.

Check with your lender if you are qualified for other emergency business loans, or any other alternative funding from other institutions. We’ve listed a couple of options for you to choose from.

Emergency Bank Loans

A more traditional lending option for you is an emergency bank loan. Despite that banks have stricter lending qualifications and longer application processes, they can offer you lower interest rates and longer repayment terms.

Just make sure to do your research first before applying for a bank loan because some banks don’t cater to relatively new businesses or those that are considered too risky.

Business Line of Credit

If you haven’t tried getting a business line of credit, this is one of the best times to do that. A business line of credit works like a credit card where you only repay what you use. A revolving line of credit can be acquired either from banks or private lending institutions and their requirements vary.

With a business line of credit, the lender will approve you for a certain amount, which you can use whenever you need it. As you pay off your balance, your credit becomes available to use again.

Having standby capital whenever you need allows you to have some level of financial cushion for growth opportunities, emergencies, unexpected expenses or any other expenses that need upfront payments.

Emergency Bridge Loans

Short-term emergency loans (or bridge loans) are designed to help remediate financing needs such as cash flow gaps, unexpected catastrophes, repair, and other expenses. The aim is to cover your capital shortfalls until you’re able to secure a more permanent funding, or until you’ve recovered from a disaster.

Some of the most common types of bridge loans are operating and mortgage loans. Bridge loans can also be used to fund equipment repairs or purchases that will help you generate more income. It can also be used to hire new employees, increase inventory, or cover payroll.

Invoice Financing

Another proven financing option to accelerate your cash flow is through invoice financing. This type of funding allows you to sell your invoices to a third party company in exchange for upfront working capital. Your lender will give you up to 95% of the total invoice value. When your customers pay their invoices, you can pay off your advance plus a small transaction fee.

Invoice financing is a great option if you’re currently stripped of cash and you need immediate capital for emergency situations. It frees up cash tied to your outstanding invoices, giving you more available cash.

4. Find a Different Lender

If you are running out of options and you can’t seem to urge your lender to help you make the best decisions, it’s probably time to explore greener pastures. If you’ve been denied an SBA disaster loan and you want to re-apply in six months’ time, SMB Compass would be glad to help you out.

SMB Compass offer a myriad of financing solutions that suit your needs and growth opportunities. We cater to all industries such as restaurants, toy businesses, manufacturing, IT and tech, automotive and hotel businesses.

We spend time getting to know our clients so we can determine the best financing solution for their business. We provide all the information they need to know, as well as the requirements they need to prepare beforehand. We have dedicated lending specialists so clients are assured of our top notch customer service.

We Are with You in Every Step of the Way

This is truly a challenging time for small businesses, just like yours. We’ll make sure to get you all the help you need particularly during this time when there seems to be no end in sight.