When it comes to providing funds to a business, loans for business are easily accessible and a quick option. A business loan can be availed from banks, NBFCs, and other lending institutions.
However, not all loan applications are approved and accepted, particularly when you apply for an MSME loan. There are a few reasons why small businesses face rejections. Let’s take a look at some of these reasons:
Bad Credit Score
The credit score is one of the first factors that the loan lenders check before approving the application. The credit score is the implication of how well the business owner manages the finances (both business and personal). If the business owner has paid all the bills and liabilities on time, he is more likely to have a high credit score. So, the higher the credit score, the more chances of getting the loan application approved.
The good news is that even if the credit or CIBIL score is bad, the business owner can take measures to improve it. Just pay all the bills on time and use a credit card under control. The business owner should also have a look at his credit report and correct all the wrongly entered entries.
Weak Cash Flow
A business plan is a must for having good cash flow. However, without these both, the loan application is more likely to get disapproved. This is because the lenders particularly require the borrowers to have a good cash flow to repay the loan amount and meet all other liabilities. The business loan will be sanctioned only with healthy cash flow.
The business owner can create a budget for his income and liabilities and follow it strictly. It will provide him with a good idea of his income and expenses. In case the business has weak cash flow and his working capital is in a crunch, the business owner needs to cut his expenses and find ways to generate business income to increase the chances of getting a loan.
Business Vintage & Collateral Requirement
How long the business is in operations is also an essential factor that most loan lenders consider. The usual vintage that the lenders ask is a minimum of two years to prove consistency in operations and profits.
Additionally, some lenders also ask for collateral, such as real estate or machinery/equipment, as security in case the borrower defaults on loan. However, if the business owner doesn’t wish to hypothecate an asset, he can avail a loan from an NBFC. Their business loan disbursement process is also very straightforward and fast.
Lack of Preparation
The business owner cannot just walk to the lender and fill the loan application to apply for a loan. He needs to be prepared with everything. Before applying for a loan, he needs to have his documents ready:
- The financial statements and projections, including bank statement and PNL statement.
- Business plan and cash flow statement.
- Credit reports – personal and business.
- Tax returns
- KYC and legal documents – ID proof, address proof, office lease, etc.
Risky Venture & Lack of Business Value
Lending institutes take a few business ventures as a risky venture because of nature and industry they are operating in. Those businesses in real estate, liquor shops, bitcoin dealing, etc. might find it difficult to convince the lenders and avail a loan. All loan lenders are risk-averse and prefer staying away from business ventures that have a risky future.
Besides, the lender also stays away from lending to businesses that don’t foresee growth. The insights are evaluated based on business order books, financial performance, and market size. Some lenders also focus on lending to a particular business sector.
Misuse of Debt Utilisation
One of the main reasons for the business loan application rejection is the overuse of credit cards or credit utilisation rate. It is basically the balance-to-limit-ratio, i.e. how much the business owner owe compared to what credit is available for him.
Thus, if the business owner keeps all factors mentioned above in mind before applying for a business loan, the chances of getting the loan application approved would increase to a great extent.