7 Reasons Your Bakery Won’t Get an SBA Loan – Baking | Region & Cash

SBA loans are the most desirable small business loans on the market because they offer large loan amounts with lower interest rates and long repayment terms. The downside is that they are extremely difficult to qualify. You must have excellent business credit and financial background to get your foot in the door. The steep eligibility criteria can be intimidating for small business owners, which is why it can be daunting to apply.

While it can be disheartening when your bakery’s SBA loan application is denied, there are ways to improve your chances of qualifying in the future. Knowing the most common reasons for rejection is the first step in positioning your business for approval. We’ve outlined the seven most common problems below.

1. You have a low credit score

Credit scores are key to business finance. And the SBA will look at both your personal and business credit reports and scores. In both cases, credit scores serve as proof of your creditworthiness. Lower credit scores usually result in poor repayment history or a lack of payment history. On the other hand, higher credit scores are considered creditworthy, and companies with these scores have a better chance of qualifying for business loans. While the SBA itself does not impose a specific creditworthiness requirement, lenders, particularly banks, prefer lending to companies with excellent credit ratings.

2. You are in the early stages of your business

In general, lenders are less likely to approve SBA loans to younger companies. Considering that only 10% of the startup population survives the first few years, the risk-averse banks might have reservations about approving your loan application if your bakery is less than 2 years old.

Some lenders may still lend to startups or those with less than two years of history. However, they usually expect the owners to have extensive experience in the field. This means that before opening your bakery you have worked in different bakeries or in any field related to baking or food in general.

Even if your business is scaling quickly but you lack the minimum business history requirements, demonstrating solid and consistent cash flow over the short time you have been in business or demonstrating a high value of outstanding customer invoices can help increase your chances of SBA to improve credit approval. Any proof that your company is doing well will help with your application.

3. Your business has poor cash flow

In addition to your business credit score and time in business, lenders also want to see how your cash flow is performing. You may be required to submit cash flow statements for a few years during your application.

By looking at your cash flow, lenders can get a more complete picture of how you’re managing your bakery’s finances through the best and worst of times. Your bank statements will also show if you have more money in than out and if you have enough left over to pay the loan repayments (if you are approved for the loan).

So what does healthy cash flow look like? In general, a company’s cash flow is considered “good” when the amount that comes in is greater than the amount that comes out. The more money the company has after expenses, the better. If the lenders find out that you are facing liquidity problems, they are unlikely to approve your application.

As mentioned, a healthy and steady cash flow, even for a few months, can mean the difference between rejection and approval, even if you don’t have years of business history up your sleeve. If your previous SBA loan application was rejected due to poor cash flow, take steps to understand what went wrong and correct those errors before reapplying.

4. Your business debt utilization is too high or too low

Debt utilization (also known as credit utilization ratio) refers to the amount of credit you are currently using versus the amount that is available to you. Ideally, companies must have less than 30% of the loan utilization at the time of applying for another loan.

Companies with high credit utilization rates are considered risky. Banks may not view them favorably as each loan added to their account can only increase their financial burden and essentially their likelihood of default.

Conversely, companies that do not have good credit history may have their SBA loan applications denied. Lenders also want to see that you are using credit responsibly and making payments on time. The more responsible you are in paying off your loan, the less risk you pose to lenders.

5. You don’t have enough collateral

Even if the government secures 80% of the loan, lenders still want to see collateral to secure the loan. It is noteworthy that the banks still invested 20% in the financing. One way or another, if your bakery cannot make the repayments, they will suffer losses.

With SBA loans, the security serves as an assurance that the SBA and the lenders can recoup some of their losses if your company defaults on repayments for any reason. If your bakery doesn’t have enough valuable assets to pawn, there’s a high chance your application will be denied.

6. You have a history of government loan defaults

One of the requirements imposed by the SBA on its SBA loans is that the company must have no history of sovereign loan default. Stafford loans, Federal Housing Administration (FHA) loans, and PLUS loans are some examples of government-backed loans. If you have previously defaulted on one of these loans or other federal loans, you cannot expect the lenders and the SBA itself to approve the financing for you.

It is worth noting that arrears are defined as failure to pay principal and interest on a loan that is due. Even if you missed some monthly repayments but paid the loan amount in full before the due date, this is not considered a late payment. In that case, you can still apply for an SBA loan.

7. You have not submitted complete documents

SBA loans are known for their extensive documentation and lengthy application process. With your busy schedule as a baker and business owner, some responsibilities can easily get snagged. Missing documents and information not only cause delays in the application process, but can also result in lenders rejecting your application altogether.

But no worry. The rejection of a business loan because of incomplete documents is not immediate. If you missed a document when you applied, lenders would usually notify you so you can submit it as soon as possible. If you still do not submit the missing documents within the specified period, the lender will only then reject your application. When applying for SBA loans, be sure to check your phone or email for time-sensitive communications from the lender.

Preparation is key

If you’re struggling to qualify for SBA loans, you’re not alone. It is extremely difficult to qualify for SBA loans, especially if your bakery is a startup. However, by keeping the above reasons in mind, you can prepare your company to reapply and increase your chances of future approval.

If you still cannot qualify for SBA loans, other financing options are available. If you have poor cash flow, less time in business, or a poor credit and financial background, applying for credit from online lenders may make more sense.


About the author Matthew Gillman is a corporate finance professional with over a decade of commercial lending experience. He is the founder and CEO of SMB compassa specialty finance company that provides education and financing options for business owners.

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