8 Feb 2017, 10:06 — 6 min read
When it comes to growing your business, you want everything to be perfect. Maybe you need a bigger office space, new equipment or a revamped product line to match the market demands. However, this quest for perfection usually has a cost attached to it! All these changes need funds.
So, what do you do to meet your business funding needs? Business loans are a viable option here.
Yes, there will be a cost attached to it too, but making weighed choices can help you be a smart borrower and the business loan will not turn out to be a white elephant! However, do you know that banks, NBFCs and other lenders reject almost half the business loan applications they receive?
What is it that makes the lenders turn down borrowers? Let us look at some reasons for a high rejection rate of business loan applications.
1. Credit history: When banks evaluate a business loan application, the applicant’s credit standing is one of the most critical factors they take into consideration. Have you missed any loan payments in the past, or defaulted on an earlier loan? Even your credit card payments or utility bills can affect your credit history and rating. Further, your credit report could be carrying some errors too.
Keep a tab on your credit rating and get any errors taken care of well ahead in time before you apply for a business loan.
2. Poor cash flow: As a business loan applicant, you need to demonstrate the financial standing of your business to the lenders. Are you able to meet your operational expenses (such as lease payment, utilities, employee salaries, etc.) comfortably?
Business owners should be able to pay the loan EMIs and save some amount for emergency expenses as well. A poor cash flow indicates weak financial health of a business, and lenders see this as a roadblock to the borrowers’ repayment capacity.
3. Applicant is/ has been a guarantor to a loan defaulter: In the past, have you signed up as a guarantor on a loan and the individual defaulted on the loan? Well, in such a case you will be required to tick off the loan. This could land you in a soup when you apply for a loan for yourself.
4. Incomplete/ improper documentation: Incorrectly filled business loan forms and improper documentation are among the most common reasons for rejection of business loan applications. Be it the loan application, a detailed business plan, bank statements or financial statements, collect them and save them online well in advance to avoid last-minute rush.
Lenders also look for information such as how you plan to spend the loan money and the repayment plan you have in place.
5. Insufficient/ no collateral: Collateral is the security or asset against which the lenders approve your business loan. In case of a default, the lender uses the collateral to recover the losses. If you apply for a secured business loan, but your collateral value is much less as compared to the loan amount you are seeking, your application will possibly be rejected.
Thus, use an appropriate collateral if you have one, or apply for an unsecured business loan.
6. Nature/ size of your business: The lender will consider the nature and size of your business while appraising your loan application. Apart from a detailed business plan, they will also weigh the industry of your venture, the core management team, business health history and finally – the cash flow trend.
7. Pending legal proceedings: If there is a pending lawsuit against you or your business, lenders may not approve a business loan for you unless it is resolved completely.
8. A recent history of loan rejections: If you have been turned down for a business loan on earlier occasions by banks, the lenders you are now applying to would like to know why your loan request was rejected.
Thus, if your loan application has been rejected in the past, it is best to find out the reason(s) for rejection and work towards rectifying the same. Doing this in advance will save your time and you do not have to jump from one lender to another.
9. A defaulter co-applicant: Is your co-applicant a defaulter? Even if you have a good credit rating and no default history at all, applying for a business loan with a defaulter co-applicant can damage your chances of approval with the lender.
These are some reasons for business loan applications to be rejected. Planning for a business loan should ideally be done months in advance, keeping the above in mind. Once you are ready, apply online through a Fintech lending platform for an easy loan application process, quick approval and timely disbursal of a business loan.
Business success is much about timing and if you can manage your funding well in time, you can win the game!
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.
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