Every business, big or small, requires capital assets and expansion. Hence, they look for a business loan, if not initially, then at some point during their expansion phase.
Apart from the regular capital requirements for the smooth functioning of the business, a major advantage of the business loan is that it does not affect the ownership of an individual in the business. The stake of the owner remains unaltered.
However, availing of a business loan, more so an unsecured business loan is not a piece of cake, and its approval considers multiple parameters, which, if not met, the application can be rejected. To make sure your business loan application process goes through smoothly and is not rejected, conduct thorough research on the prerequisites for the loan and complete the documents accordingly.
8 Reasons Why Your Business Loan was Rejected
Let’s have a look at some of the major reasons why a business loan might get rejected:
- Poor Credit Score: Credit Score is the three-digit magic number that ascertains your financial credibility. Hence, a low CIBIL score negatively impacts your loan application. People with CIBIL Scores as low as 650 or lower might face rejection of their business loan application. On the other hand, a CIBIL Score above 700 might fetch you some preferential interest rates. If you are approaching an unsecured business loan, make to check your CIBIL score and ascertain that it is considerably high.
- Heavy Debt Usage: A business with excessive debt poses a concern on their repayment capability and the lenders usually avoid lending such loans. So, keep your debts in check and pay off whatever is possible before making a fresh application.
- No Proper Business Plan: To convince the lenders about the purpose of the loan, a proper, well drafted and concrete business plan must be submitted along with the loan application. The absence of an effective business plan or a failure in presenting it to the lenders might lead to a dilemma or confusion regarding the risk associated with loan sanctioning. This might lead to the turning down of the loan application by the lenders.
- Business Risk: Another major factor that lenders check for, is the kind of business or the industry you are venturing into. Regardless of all your documents and financial credibility, if the lenders are not convinced of the risk associated with your business, they might turn down the loan application. For example, in industries like construction, restaurants, gambling etc. that either have a volatile nature or are considered a vice, the chances of your loan application getting through are few and far between. Also, industries like the transport business and others where economic factors like fuel prices, inflation etc, play a major role in determining the fate of the business, might face a knock-back at the hands of the lender.
- Absence of Collateral: Collaterals are required with unsecured business loans by many lenders as a security to hedge the lenders’ risk on the loan. Collaterals are valuable assets that are pledged while taking a loan, as a safety measure so that in case of any borrower default, the lender can seize the collateral and recover the loan amount. For the same reason, the collateral value must be equal to or higher than the loan applied for. In cases, where the business is relatively new, with no collateral to pledge for or the assets are already pledged for some other borrowings, the loan application might get rejected.
- Cash Flow Limitations: New businesses particularly face this problem. Business cash flow is one of the primary factors that the lender considers to judge your loan repayment capability. They require a certain level of monthly or annual business revenue, with the number depending completely on the lender. In cases where you are a fairly new business and have no previous ITRs or less than sufficient P&L statements to show to the lenders, it might be a curb on your loan efforts. To deal with such a situation, you can maintain a good cash flow for whatever time you’ve been in the business. For this, follow proper invoicing, cut down any unnecessary expenses and establish an emergency fund.
- Missing Documents or Information: Along with the loan application form, certain loan documents are required to be submitted, with complete details mentioned wherever required. Any lapse on this part in the form of incomplete, forged, missing or fake documents or information, might result in an outright rejection of the loan application by the lender.
- No Strong Purpose for Loan Requirement: For Business Loans, the lenders always require to know the exact reason for the loan requirement. It can be for any purpose like marketing, purchase of new machinery, Research and Developmental purposes or anything. But if the purposes are not presented, not credible enough or not aligned with the business requirements, the lenders might not be convinced to grant you the loan.
What to do if my Business Loan gets Rejected?
Once you know why your loan application is rejected by the lender, either through self-check before applying or through rejection by the lender, you are better prepared to work on the “misses”. Here are some of the major ways through which you can increase your chances of getting your unsecured loan application approved:
- Clear your Debts: Improve your debt-to-income ratio and borrowing capacity by clearing off any existing debts.
- Improve Credit Score: Work on improving your credit score. Maintain a disciplined payment cycle for all accounts receivables and credit card bills, maintain a low credit balance and work on all other factors that help in improving the credit score.
Apart from the above major factors, work towards improving your financial obligations, have a tax strategy in place, be updated with the latest trends in the market and formulate a proper business plan that shows your growth potential to the lenders. With all these factors in place, it would be much easier for you to get through this process of getting an unsecured business loan sanctioned.