8 Reasons Your Business Loan Was Rejected

When Devesh Patel, proprietor of Devesh Patel and Sons, a mid-sized manufacturer of automobile spare parts in Kolkata applied for a business loan for expanding his business, he was very confident of his loan getting approved. However, to his utter dismay, his loan wasn’t sanctioned on grounds of a lack of a concrete business plan.

“I should have given more time while developing my business plan. My expansion projects took a backseat till the time I procured the loan,” says Devesh. He is not alone. India’s small and medium-sized business sector has many such cases.

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Business loans can act as a lifeline for your operations when you eye expansion or want to make the most of the opportunity the market presents. Though availing these loans may seem tricky for owners, especially first-timers, it’s not so. In fact, these days it is a lot easier to avail a loan if the prerequisites are in place. The lenders will be more than happy to lend you.

“Business loan approval depends on various parameters and a loan stands a chance of rejection if these are not met, ” says financial advisor Nitin Gulati. He further adds, “The best way to handle rejection is to research the reasons behind it and to improve on them to secure the business loan eligibility criteria in your next application.”

Here are 8 reasons that can lead to loan rejection:

1.    Low Credit Score

A good credit score reflects effective budget and expense management. If you have a poor credit score, it shows the lack of financial prudence on your part. A credit score is required for many reasons. One of them being your intention and capacity to repay your loan. Before applying for a loan, you must check your score with reputed credit rating agencies. Not only that, but also you must have a look at it and see that you take measures to improve upon it.

“One of the primary reasons for a low score is the use of high percentage of credit amount. The ideal percentage is approximately 30% of the total available credit,” says Nitin from Bajaj Finserv.

2.    Insufficient Cash Flow

Your cash flow analysis shows your capability of repaying your loan after covering operating expenses. Insufficient cash flow affects the confidence of lenders. You can improve your cash flow by:

  • Cutting out unnecessary expenses
  • Maintaining proper invoicing
  • Setting up an emergency fund

“Creditors may charge high business loan interest rate from firms with inadequate cash flow as the risk proposition increases manifold,” says Nitin.

Also, it is one of the first things checked by lenders. Therefore, make sure that you have enough of funds in your bank account before you apply for a loan.

3.    Too Much Debt

If your business is in too much debt, it will turn away potential creditors. “The primary concern of a lender is repayment. When a lender sees you piled under huge debt, it’s natural to be a little wary,” quips Nitin. Maintaining low balances in the line of credit and paying away past debts will help you resolve this issue.

4.    Too Early into Business

Creditors look at your past performance records and market experience to sanction your loan. If you are a first time entrepreneur, alternative funding channels such as crowd-funding, grants, and small business loans by the Government are handy. You need to establish your credibility before applying for a loan.

5.    Lack of a Concrete Business Plan

If you don’t want to suffer Devesh’s fate, it’s prudent to develop a robust business plan. Before presenting the documents required for business loans, you should conduct an in-depth study of the market factors. This helps you get an unbiased and pragmatic consideration of the business possibilities a scenario offers.

“Investors use the business plan to predict and simulate future risk vs return scenarios,” points out Nitin.

6.    Lack of Collateral

Investors look for tangible security to back up their investments. You must have a clear understanding of your inventory of assets that you can use as a collateral before opting for a loan.

If you are not in a stage to offer tangible assets, you may have to mortgage your personal assets to get the required funding.

7.    Not Knowing the Purpose of Loan

Why do you need a loan? Is it for purchasing essential equipment, developing a new product, or renovating your office? If you are not sure of the purpose of your loan, lenders are less likely to process your application.

“While renovating an office sounds great, sadly, it doesn’t strike a chord with creditors,” says Nitin.

8.    A Risky Venture

Dominant factors in the economy of a nation play a major role in influencing investor sentiments and decisions. For example, if you plan to invest in a transport business when the cost of fuel is rising, the same may not find much interest with the available investors.

Hence, you need to keep yourself abreast with the micro and macro-economic factors and political developments surrounding you and grab opportunities provided by them.

It’s common for a business to struggle to keep its head above the water when the economic scenario takes a dip. Note that a loan rejection though discouraging is not the final straw in the survival of a business.

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