Starting a business is one of the most challenging tasks to undertake. It takes a great amount of money to launch a business, and with commercial lending on the rise, it is ideal to try to obtain business loan financing. However, it is quite common for the applicants to get rejected for a business loan. Many times the reason for rejection is not the business idea, but rather a mistake on the part of the applicant.
Let’s assess factors that can result in loan rejection.
Credit score: One of the major reasons why small businesses face immense trouble while applying for a business loan is a poor credit score. A credit score helps the lenders to assess the creditworthiness of the borrowers. If your business has defaulted loans in the past, this will reflect in its credit score. You can rectify it by paying your dues on time and keeping your credit consumption low. Lenders generally avoid offering loans to businesses that already have a lot of debt. Hence, it’s important to have a good credit score for getting a business loan.
Inadequate cash flow: A healthy cash flow means that you can pay the loan on time. Most lenders avoid lending to businesses with a poor or negative cash flow. A negative cash flow may arise when expenses on payroll and inventory consistently exceed the monthly income. In such situations, lenders avoid giving business loans to the borrowers.
Inadequate collateral: Lenders extend business loans on the basis of collateral or security pledged. This is their option to recover their amount in case of any default. At the time of loan application, you are required to furnish the details of the collateral and it should match the lender’s criteria. You also have the option to apply for an unsecured loan but that means you would be required to pay high-interest rates.
Too early for a loan: If your business is in its initial stage, the lender may reject the loan application. To ensure repayment, banks and NBFCs want to confirm that your business is making money or not. Consider alternate sources of financing like crowdfunding or government loans that help to finance start-ups.
Your plan is not good enough: Lenders are hesitant to lend to a business that has no clear mission. Your business plan should clearly show your project's objective, marketing strategies, revenue generation plan, etc. The lenders also consider the potential of the business. They examine the ability to stand ground in a competitive market. They may even assess the time from when the business might start making money. Only then will they agree to sanction the loan.
Lack of proper documentation: Lack of proper documentation can lead to rejection of your business loan application. Make sure you have all the required documents before applying for the business loan. Some of the important documents are the last few years’ income tax returns, the entity’s proof, audit reports, KYC documents, bank statements, etc.
Hence, borrowers can use the above-mentioned list to avoid rejection of a business loan. Availing a business loan can help in launching a new company. But the borrower will still have to successfully run the business and pay back the lender. So, always make sure to borrow as per your repayment capacity and pay back on time to avoid any penalty charges.