What disqualifies you from an SBA loan

A decline for an eligibility reason and a decline for a credit reason feel identical when you get the call. They are not. One means stop; the other means find a different lender.

Eligibility: the hard stops

Federal debt, which catches more people than expected

Delinquency on any federal obligation disqualifies the applicant until it is cured. That reaches further than most applicants realize:

• A defaulted federal student loan, held by any owner or guarantor. Rehabilitated and current is a different story from delinquent, and documentation matters.
• Delinquent federal taxes. An installment agreement in good standing, documented, is treated differently by many lenders than an unaddressed balance, though a federal tax lien creates its own lien-position problem.
• A prior loss to the government on a guaranteed loan. This is the hardest of the hard stops, and it generally persists until the loss is repaid.

Lenders screen for this through the federal delinquent-debtor system and through the borrower information form, which asks directly. Answering it wrongly is far worse than answering it honestly and dealing with the consequence.

Affiliation, which turns two small businesses into one larger one

Size is measured with affiliates included, and affiliation reaches further than ownership.

Affiliation can arise from common ownership, common management, identity of interest between close relatives, or contractual control — including, in some structures, a franchise agreement that gives the franchisor excessive control over the operation. The franchise question has a standard route: a franchise agreement that meets the SBA's criteria is treated as not creating affiliation, and lenders check the current position before underwriting rather than relying on a past determination.

Disclose every entity you own, control or manage at the start. Affiliation found at closing does not merely resize the deal; it can make it ineligible.

Criminal history

The SBA narrowed this. The current standard turns on present criminal justice status — incarceration, parole, probation, or a pending indictment — rather than on old convictions. Because the wording has changed and could change again, read the current question on the borrower information form and confirm at sba.gov rather than relying on advice from a few years ago.

Credit judgments, which are not disqualifications

These are the lender's call and vary between institutions:

• Cash flow that does not cover the debt with a margin.
• Recent delinquencies, open collections, unsatisfied judgments, recent bankruptcy.
• No equity injection, or an injection nobody can source.
• No relevant industry experience on a start-up or acquisition.
• An industry the lender avoids, or a loan size it does not do.

A no here is one institution's answer. Ask for the specific reason, fix what is fixable, and take the file elsewhere.

What to do first

Run the eligibility checks before you spend a week on documents: business type, passive income, size with affiliates, ownership, federal debt, criminal justice status. Any of those can be answered in an afternoon by the lender's SBA department, and every one of them is cheaper to discover now than at closing.

The three documents that answer it in an afternoon

Take those three to a lender's SBA department. Eligibility is a rules question and they answer it quickly. Credit is a judgement and it takes weeks.

After a decline, what you are entitled to ask for

If a business credit application is declined, the adverse action requirements under the Equal Credit Opportunity Act and Regulation B can entitle you to a statement of the specific reasons, with the obligations differing according to the size of the applicant business. Ask for it in writing rather than accepting a reason given on a call.

Then sort what comes back into the two categories this article started with.

• A rules reason — ineligible business type, size, federal debt, ownership — means the answer is the same at every SBA lender. Change the underlying fact or change the product.
• A credit reason — coverage, collateral, injection, industry, loan size — is one institution's answer. Ask what would have made it approvable, and what size or structure they would have done instead.

That second question is the productive one and it is rarely asked. A lender that has just declined you will often say precisely what the file was missing, and that answer is what you carry to the next lender.