Business Loan

Reasons Why Your Business Loan Was Rejected


No matter the type of business, having a consistent cash inflow is critical to successful operations. There are also times when unanticipated obligations arise, and extra funds are needed to ensure the smooth functioning of the business. Or you may need extra funds to expand your business. This is exactly where business loans act as a lifeline and prove to be immensely beneficial. However, having your loan application rejected by a financial or banking institution might be a disappointment.

You’d have to keep in mind that the approval of a business loan comes attached with certain approval parameters. So, if your business loan has been rejected, you must understand why it was denied. It will help you focus on improving the chances of your business loan application when you apply the next time. 

Top reasons why Business Loans may get Rejected

Instead of being discouraged by the rejection of your business loan, you must try and understand the reasons behind it. Let’s have a look at some reasons why your business loan was rejected: 

  1. Inadequate Credit Score

It is safe to say that the top priority of every lender is the timely repayment of the loan. The business loan interest rate that gets levied on the borrower is an incentive for the lender. So before authorising a loan approval, lenders assess several variables. One of the most important variables is the credit score of the borrower. 

Assessing the credit score of a borrower helps the financial institution determine whether they can repay the borrowed amount. The credit score varies between 300 and 900, where 300 is the lowest and 900 is the highest. You should keep in mind that a credit score of 750 or above is considered excellent for loan acceptance. 

When you have a bad payment history due to late or missed payments, or even administrative errors, it affects your credit score and causes the lender to reject your loan application.

  1. Insufficient Cash Flow

As a borrower, it is crucial to ensure that your business has a substantial cash flow when you apply for a business loan. You must note that cash flow gaps occur due to lower cash inflows and higher cash outflows. In addition, it is important to know that inadequate cash flow hampers routine operations. Especially, if it continues over some time, it can compromise the company’s viability.

Your business can have a negative cash flow due to the following reasons: 

  • Lower seasonal demand,
  • Over investment,
  • High overhead expenditures,
  • Low earnings,
  • Overstocking, and 
  • Inadequate financial planning. 

No matter the reason, having negative cash flow indicates a budget deficit and financial challenges. This is perceived as incapacity to repay the loan, which leads to the lender refusing your business loan. 

  1. Unpaid Dues or Debts

If you have already taken several other loans for your business, there is a high possibility that your business loan may get rejected. When you already have a significant outstanding debt, it indicates that you may be unable to repay future monthly instalments. 

So, even if you have a good credit score, financial institutions/lenders will still assess the overall credit utilisation ratio of your business. 

What’s a credit utilisation ratio, you may think? 

Well, it is the ratio of total credit used by your business to the total credit limit available. It is most commonly highlighted as a percentage. In most cases, financial institutions/lenders do not prefer borrowers to use more than 30% of the total available company loan.

If you have a low credit usage ratio, it indicates that you have a lesser reliance on credit. This, in turn, helps you build a good credit score and also helps you secure a business loan easily.

  1. Inadequate Collateral

Most business loans are usually secured. This security is either collateral or a personal guarantee. Having collateral helps reduce risks. If you are unable to repay the loan, having suitable properties as collateral helps lenders to have a high resale value.

For the same reason, you must not select any intangible or outdated property or a property that has contested ownership. Doing so may result in the rejection of your loan application. So, you must select appropriate tangible assets as collateral when applying for a business loan.

  1. Unachievable Business Plan

When you apply for a business loan, you must have a clear objective for what and how you will use the funds. Lenders may be put off if you do not request enough funds, or are asking for too much of it. 

A classic example of this would be when young entrepreneurs, who want to do more in less time, come up with unachievable business strategies. This deters lenders from sanctioning a loan. 

On the other hand, it is advised that you have well-planned specifics of the financial goals of your business, backed with mapped strategies on how you plan to achieve them. This will help banks and non-banking financial institutions thoroughly analyse your business plan.

Your way ahead with Business Loans

Owning a business and running it successfully is not an easy task. So, if your business loan has been rejected, don’t be discouraged. You can recover from it. Keep in mind that when you apply for business loans, you must have all legal documentation, such as contracts, leases, licences, and so on. It reduces the chances of being rejected by lenders. 

You must also be open and honest with lenders about your credit history. If you submit incorrect information to the lender, it may result in a misfire. Most banks and NBFCs, such as Piramal Finance, advise borrowers of the reason for rejecting their business loan applications.

Besides, reputed lenders such as Piramal Finance also offer advice on how you can improve your chances of business loan approval later on. You can quickly check the Piramal Finance website and start applying for a business loan. It’s completely hassle-free, simple to navigate and provides quick disbursals. So, what are you waiting for? Explore business loans that suit your business requirements the best and get started on the way to success!