Finance management in a small business is a tremendous task. Availability of liquid funds is paramount from starting a new business to maintaining cash flow in an existing one. This is why there are numerous options for a business loan in the market, some of these are specially curated for MSMEs. Of course, this means that if you have to get your loan approved, there are many things to keep in mind – especially how to avoid getting your loan application rejected. Few factors such as your business details, financial records, and loan repayment history play a critical role in a loan application. These loan denial reasons will help you gain a better understanding and get your business loan applications sanctioned. These reasons also highlight the negative profile for loan.
Top 7 Reasons For Business Loan Rejection
1. Business Plan with Loopholes
For all those aspiring entrepreneurs who have decided to chart their own career path, a strong business plan is the first line of defense in arguing your case with the lender. Often, in haste, people create business plans that don’t quite fit the mark. A good business plan introduces your business to the establishment, a financial plan for what you would use the loan for, and how you plan to retrieve the money back to repay the establishment. Elements like profit margins, potential customers, some of your competitors, and information about the industry itself should be included in your plan. To make the plan eligible for a business loan and a good sale, you may want to include the mission, vision, team introduction, and the experience that you bring into the venture. This will help bring some personality to your plan, and will certainly help the establishment to understand you better.
Having a detailed business plan free of loopholes can help secure debt funding really easily. Lenders take the decision about lending an applicant money based on the information provided. If there is a disconnect in the provided information, the lenders lose confidence as it makes the loan investment risky for them. A risky loan application is usually not desirable for the lenders as it increases their portfolio-wide risk concerning default risk, credit risk, etc. An applicant while making an application for debt funding should give ample information that puts the lender at ease and inspires confidence that their loan asset has manageable risk and the applicant is capable enough to repay the loan. Inconsistent information and loopholes in business plans is one of the leading reasons for loan rejection.
As highlighted earlier, information around the business’ financial health, future outlook, growth trajectory, market analysis, industry outlook are some of the important aspects that the lenders take into consideration. It is desirable if the applicant can make that information available to the lenders to make it easier for the applicants to secure debt funding from financial institutions.
Also Read: CIBIL Score for Business Loan
2. Bad Credit History
One of the most important aspects that the lenders take into consideration is the applicant’s credit history. All the financial institutions take your credit history into consideration before approving or rejecting the loan application. It also helps lenders assess the risk associated with lending the money and how much interest rate is to be charged that is consistent with the risk level tied with the applicant.
If you have been intimated with a loan rejection sms or a “Loan Rejected” Email, then credit history might be one of the reasons for the loan rejected message. Credit history of your company, and of its directors, is also an essential factor in your loan application. If you have missed paying your credit card dues or EMIs on time, it can lead to a low CIBIL score, which will lead to the rejection of your application. Even missing one payment can adversely affect your credit report. Be aware of how you handle your finances, especially in relation to your credit history, impacting your business loan application. Reasons for debt application rejection could be several, please read along to know more!
There are many reasons for rejection of loan application due to unfavorable credit history. But it is imperative for us to understand what are the reasons behind bad credit history and how you can avoid making such mistakes and increase your credit score.
- On time Repayments : On time repayment is one the biggest contributors to a person’s good or bad credit score. Whatever loan you may have, the information regarding your repayment is reported to the credit bureau, due to whatever reason if you miss out on a repayment, then that information will be tied to your credit history, and will be available for all future lenders.
- Default on Loans : An applicant with a past default is a major red flag for the lenders. Chances to secure a future loan diminishes in case of a ast default
- Too many credit enquiries :Having too many hard credit enquiries, i.e. loan applications can have a negative effect on your credit score. Hence, it is essential to only make enquiries when you want to take a loan.
3. Disorganized approach
It is better to be prepared with your financial records beforehand than scramble for these when the application is already underway. This shows your preparedness and allows you to fill any gap that may occur. Usually, lenders check the income statements, cash flow statements, and balance sheets to understand if your ability to repay the loan is impaired or not. It is better to accumulate these statements and provide them on demand, rather than delaying your process. Keeping an organized folder during your loan application process is as important as any other step. They will also require identity proofs of you and your business.
4. Lack of Truthful Disclosures
Lenders process loan applications based on the information and disclosures given by the applicant. However, the lenders everytime do the verification of the information provided by the applicant. There are certain checks and balances and standardized processes in place to ensure that the default risk in the lender’s portfolio should not increase citing erroneous or willful misrepresentation by the applicant. Lenders have access to the applicant’s credit history, as those rights are given to the lenders while applying for a loan with them. Apart from that the lender may also verify the authenticity of the information and finances to ensure truthfulness. Be aware that the establishment that provides you a loan will cover all the bases by conducting a background search. They will probably find all financial records, including any declared bankruptcies, debts, and issues arising from bounced cheques. You may want to be truthful at the get-go and give them enough reason to consider you despite your past issues. If these issues are unearthed during their background verification without your disclosure, then your business loan application will be denied.
5. Time in Business
Banks or financial institutions in the lending space always ensure that they minimize their lending risks by effectively eliminating non-eligible or even less eligible applicants. Apart from a solid credit history, and healthy financials, lenders may also consider the business’ or entrepreneur’s operational experience before approving a debt funding for the business. This practice helps the lenders understand the risk associated with the applicant’s viability in the market. By having entrepreneurs with a good amount of entrepreneurial experience, or business being in operation for a longer span of time, lenders are able to have a sense of comfort that the applicant holds enough experience to efficiently use the capital infusion in the form of loans, and will be able to repay the loan on time.
Often, businesses usually run into problems while acquiring a loan when their experience or professional history in the industry seems lacking. Larger banks would look at a perfect business plan but also look at the people applying. If it appears that a team or a sole proprietor does not have enough experience in the industry and may not be capable of running the business as per the forecast, they might reject the loan. Lendingkart is more flexible than banks in this regard.
6. Issues with Collateral
As highlighted earlier, the lenders would always prefer to eliminate risk associated with lending. They do this by keeping certain checks and balances in place and having a set process. However, inherent risks associated with default cannot be eliminated completely with these measures. Hence, lenders sometimes ask for collateral. These collaterals serve as a security, in case of default the lender would retain the right to liquidate the asset or the collateral to recover any outstanding sum be it principal or the interest component. Collateral usually are of more value than the loan value disbursed to the applicant. This is because the lenders would like to have some cushion, as in case the total outstanding becomes more than the original loan value, then the asset taken as a collateral would still help the lender recover outstanding payments from the borrower.
If your loan status shows as “Business loan denied” then the collateral can be a reason. Usually, banks and other established lenders take collateral against a loan. If the borrower defaults, the banks acquire the collateral for the money lost. This can be any high-value item like real estate, house, inventory, machinery, and so on. If there are issues with the collateral, say multiple ownership of property or a legal dispute, then it is a red flag to banks suggesting ineligible collateral. Lendingkart does not take collateral but works on assessing your loan application better by using numerous data points.
7. Criminal History
Lenders always prefer to give loans to borrowers with a clean repayment history. If the applicant is not truthful of the past records, it might lead to the lenders pulling back the loan funding. It is imperative for the applicant to make all relevant disclosures, as it helps the lenders make correct assessments. Based on this information, the lender makes a call of approving or rejecting application, and also decides on the terms and conditions of the loans in case an approval is being given.
Last, it is important to note that your past will play an essential role in your loan application. If a person comes with a criminal history, lenders may be compelled to reject the loan due to the lack of trust in the transaction. Therefore, it is important that the applicant either discloses their criminal history with the appropriate reasoning that may cause reconsideration or have another person apply for the loan.
Eligibility Criteria for a Small Business Loan
There are a few eligibility criteria you need to meet before you can apply for a small business loan:
- First, you must be an Indian national.
- Second, your business must have been in operation for at least three years.
- Third, you must have a CIBIL score of 685 or higher.
- Fourth, you must be self-employed.
- Lastly, you must be between the ages of 24 and 70.
If you meet these criteria, you can apply for a small business loan and get the cash you need to grow your small business.
However, if you have any questions or concerns around eligibility criteria or documentation requirements, you may reach out to customer care, in case of business loan customer care number is easily available to the public.
Also Read: How to Get a Small Business Loan for a Startup
Documents Required for a Small Business Loan
- Application form: The application form should be completed with all the necessary details about the business and the borrower. This form should also include a detailed business plan and credit history.
- Proof of age: It is required to prove your age and identity. This can be done through an officially issued document such as a driver’s license or passport.
- Proof of identity: It can also be a government-issued document such as a driver’s license or passport. It is necessary to provide this information as it will help lenders verify your identity and assess your creditworthiness.
- Address proof: It is an important part of the loan application form and should include a current address and proof of occupancy, such as a utility bill or lease agreement.
- Financial documents: They are also an important part of a loan application form and can include tax returns, balance sheets, income statements, and other financial statements. These documents are required to show the lender that the business is profitable and can make repayments on time.
Conclusion
These business loan rejection reasons should have helped you gain a better understanding at why business loans get rejected by lenders. The best way to move forward with a business loan application is to be organized with your application. With organization and structure comes a preparedness to deal with arising unexpected circumstances. It is also crucial to know who you are getting into business with. Often, banks are quite rigid in their ways. There are many other options in the market that provide flexible, empathic services to those in need of a business loan. To apply for a business loan from Lendingkart.
Lendingkart understands what it feels like to be part of the entrepreneurial globe, so they try their best in making funds easier to access for businesses. Banks traditionally take a lot of time before processing a loan and have strict requirements, while Lendingkart usually focuses on quick and easy access to loans. On the online website, one can apply directly with his or her requirements, and results are received in no time; then, one can concentrate even more on the business instead of getting tangled up in papers.
Repayment terms are a major game changer from FinTech lenders such as Lendingkart. Fluctuating cash flows characterize businesses but having the flexibility to either adjust payment schedules or amounts helps in times of financial stress. This ensures that you can manage finances even better while keeping business operations smooth.
lendingKart offers a host of convenient features, fiesta and foremost the application process is really simple and quick, the paperwork is hasslefree, and digital. Moreover, you can track your application status online, once the application is approved, the disbursal is also lightning quick!
You want to prepare an application by making your credit profile as rich as possible and assuring your financial documentations in good standing. Good credit history can literally be the difference between getting a loan approved or not, so this is very valuable, regardless of the lender you may opt for. Lastly, presenting a thoughtful business plan can make for a very compelling loan application and, therefore, to repay your loans.
In a nutshell, though business financing may seem quite of a maze, being well-organized, fully informed, and not averse to alternative lending sources will greatly better your chances of securing business funds. So, seize the day through the modern lending platforms and do not be afraid of consulting financial gurus to get you through it. Through this, you will more than adequately be prepped for securing funding that will ignite your burgeoning business and fulfill all your entrepreneurial aspirations.
Frequently Asked Questions
What are the most common reasons given by banks for rejecting Small Business Loan applications?
The most common loan rejection reasons given by banks are inadequate cash flow, insufficient collateral, a weak credit score, or a lack of relevant business experience. Banks consider these factors to evaluate an applicant’s creditworthiness.
Why unsecured Business Loans are gaining popularity among small businesses?
Unsecured business loans are gaining popularity among small businesses due to their flexibility and convenience. The lack of collateral and minimal paperwork make unsecured business loans ideal for businesses that need access to capital quickly and don’t have assets to put up for security.
How can you overcome a situation where your business loan is denied?
Start by examining the loan denial reasons and making necessary changes to your application or business plan. If needed, look for additional sources of capital or consider securing a loan with a co-signer. Additionally, improve your credit score and build a rapport with the lender. Lastly, have patience and don’t give up – it takes time to secure the right loan.
Which are the best banks for availing business loans?
Some of the best lenders include HDFC, Axis and ICICI.
What are business loan eligibility criteria?
- You must be an Indian Citizen
- CIBIL score should be 685 or higher
- Must be self-employed
- Should be between the ages of 24 and 70, etc.
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