A small business owner counts on a business loan to help his business grow and expand. But not every time his loan application is approved by the lender. This can be because of various factors, ranging from low credit score to an ongoing loan on the borrower. It goes without saying that a business owner applies for a loan when he is an urgent need of funds. So, getting the application rejected is not appreciated in this situation. The loan application denial can be avoided if the businessman knows the reasons for the same.
Let’s take a look at the top reasons why a business owner is turned down for business loans:
Table of Contents
Bad Credit Score
Credit history is the most important factor considered by every loan lender in India. A good credit or CIBIL score will represent that the business owner has managed his business and personal finances well. Whereas a poor credit score will show that the borrower is not able to manage his finances properly. The score can be improved by paying bills on time, keeping credit utilisation under 30%, and ensuring all loans are paid on time.
Weak Cash Flow
Weak cash flow is also an important reason that leads to getting the loan application rejected. The borrower can create a budget and stick to it. This will provide a better idea of how much cash is coming and going, i.e. inflow and outflow of cash. If there is weak cash flow, the businessman is required to cut expenses and find ways for the cash inflow.
The time in business (business vintage) is also important. A business being in operations for at least 2 years is more likely to get his application approved than the one who has just started his business. It is an important qualification for a small business loan. The reason? Loan lenders offer loans to businessmen who are operating their business efficiently for at least 2 years. The business vintage provides them an insight into how well the business owner is managing the business.
Lack of Preparation
Many business owners aren’t tech savvy and they are not aware of the online loan application process. They simply walk into a bank branch and fill out an application form. Nowadays, many new age lenders are operating in the market that provide online loan applications. This saves a lot of time and the application process is also very easy.
There are times when a businessman has a solid credit score, strong cash flow, and all documents at the place. But, he is still denied the loan application. This is because of various outside factors which include, business industry, business location, and competitors. All these factors can also lead to loan application denial.
Getting the application rejected when there is a need for an SME loan is one of the worst feelings. And if you take care of the above mentioned 5 points, you can get the application for a loan for business approved in the first go itself. That being said, it is important that you perform research on the loans lenders as well. Choose the lender which offers the best business loan services at easy to meet terms and conditions.