Many small business owners apply for SME loans for their business. However, getting the SME loan application rejected is not less than a nightmare for an SME owner. As per the reports, the number of applications which are denied is more than the approved ones. Many business owners pass through the same situation where they get a negative response from the lender.
The risk of the business loan turning into NPA has made loan lenders more restrictive on approving applications. Additionally, there are several other reasons as well that lead to loan application disapproval. If the borrower knows in advance the reasons for this, he can prepare his application accordingly.
Read on to know the reasons why SME owners are turned down for business loans:
Table of Contents
Credit Score
No lender grants SME loans to borrowers with a low credit score. All lenders check the credit or CIBIL score of the borrower before taking any decision. So, a good score is a must-have requirement to get the application approved. Additionally, a negative remark on the credit score can also lead to application rejection. So, if a businessperson applies for the loan with a low score; he is most likely to either get the application rejected or approved at a high interest rate.
Cash Flow
The cash flow of the small business is the other most crucial factor checked by all lenders. This factor is considered to ensure that the borrower will be able to pay monthly instalments on time. This is also one of the biggest reasons why the start-ups are denied business loans since they cannot provide any cash flow statement. So, a weak cash flow statement is a primary reason due to which an application is rejected.
Business Industry
Some business industries are riskier than others. If may happen that the business is running well even if it comes in the risk zone. But the lender may be hesitant in offering money. It is witnessed many times that the loan application is rejected just because of the industry in which it is operating. In cases like these, the business owner needs to search for the SME loan lender who specializes in his industry.
Business Vintage
The duration for which the business is being operated in the market is also taken into consideration while sanctioning SME loans without collateral and with collateral. Most of the lenders approve loan applications only if the business has a minimum vintage of 2 years. Business vintage also helps in providing documents, such as ITR, bank statement, and cash flow statement.
What To Do When An SME LOAN Application Is Rejected?
Getting the SME loan application rejected is not the end. There are a few steps that can be taken:
- First of all, the business owner needs to find the reason for rejection. If the cause is correctable, he can correct it at the earliest.
- A rejected loan application impacts the credit score negatively. So, the business owner needs to rebuild his personal and business credit score before applying for the next loan.
- Another critical point to understand here is that there are other lenders as well who are operating in the market. So, the small business owner can apply for a business loan with an NBFC.
- In addition to the above-said points, the business owner should also check the business loan EMI before availing the credit service.
If the business owner wants to get the application approved, he needs to prepare himself and his business to not leave a single scope for the lender to say NO to his application.
