Every business needs money to operate successfully. Applying for a business loan is something that most startups do to kickstart their business operations. While there are many business loans available, there is no guarantee that every business loan will be accepted. There are multiple reasons for a business loan rejection, including a bad credit score or businesses that are in debt. But after a business loan gets rejected, there are still steps that can be taken to ensure that your business receives the funding it requires. Here are a few things you should do if you ever face a business loan rejection.
Determine the Cause of a Business Loan Rejection
It is very important to understand the reason for your business loan rejection. This can help you take the necessary steps to make improvements before applying for another business loan. Generally, your lender should send you a business loan rejection letter within 30 days with detailed information about why your business loan was rejected. If not, you can raise a request for this.
A few common reasons for business loan rejections include:
- Poor credit score
- Cash flow issues
- Excessive debts
- New business
- Absence of collateral
- High-risk business
If your business loan was rejected, there should be a reason for it. Find out what that reason is and work towards improving your standing in that area.
Evaluate and Improve Your Credit Score
A credit score is an important factor that helps banks approve or reject business loans. This will help them evaluate your income as well as your repayment capacity.
In India, four credit bureaus calculate and manage credit scores:
- TransUnion CIBIL
- High Mark
Out of these, the CIBIL score is the one that most banks, NBFCs, and private lenders consider while approving business loans. Ideally, a CIBIL score of 750 or above should be good enough to get your business loan approved.
You can improve your credit score by following the steps mentioned below:
- Make sure you repay your debts and clear your credit card dues within the required time.
- Restrict your credit utilisation to less than 30% of your total credit limit.
- Request an increase in your credit card limit if possible.
- Check your credit report for errors and have them corrected as soon as possible.
If you cannot improve your credit score even after following these steps, you can try applying for a secured loan. Your bank might approve your loan if you have collateral, as the risk involved will be less.
Correct your debt-to-income ratio
How much of your business’s earnings go towards repaying your debt is a factor that most banks will consider when approving your business loan. This is called the debt-to-income (DTI) ratio.
The debt-to-income ratio is calculated by dividing your total monthly debt repayments by your monthly gross profits and then multiplying the result by 100. The lower your DTI, the better your chances of getting a business loan. Keep your DTI under 36% if you wish to get your business loan approved.
Check your documentation.
You have to make sure your documentation is in order if you want to apply for a business loan. In addition to the documents that show who you are and where you live, you will also need to send:
- Bank statement for the past six months
- Your latest income tax returns, along with the computation of your income, duly certified by an authorised chartered accountant
- Certified copies of your profit and loss account and balance sheet for the past two years
- Proof of continuation, such as your trade license, sales tax certificate, or establishment certificate
- Other important documents, such as your sole proprietorship declaration, partnership deed copy, or a certified true copy of your memorandum of association (MOA), should be included, along with an original copy of the board resolution.
Make a list of all the documents you need to make sure you have everything you need.
Identify alternate sources of funding.
Banks follow strict rules to approve business loans. As a result, most owners of small businesses and startups find it very difficult to get their business loans approved. This makes it very important for businesses to look for alternative financing for their business operations.
Alternative financing is available from external lenders who offer loans to businesses with poor credit scores. They are easier and faster to get since the lending criteria are not as strict.
These are some alternative financing options if you are facing a business loan rejection:
- Line of Credit: This is a source of funds that you can access whenever you require finances. Most small businesses use this for equipment financing. It is more or less like using a credit card in that you will be approved for a certain credit limit for a specific period. You can borrow as per your need, as long as you do not cross that limit. This might come in handy while meeting payroll expenses, especially during lean periods.
- Instalment Loans or Term Loans: These are loans that you repay over time by making regular payments in instalments. They are similar to the loans that you obtain from banks or credit unions. However, they are offered by many external lenders online. You can apply for these on the official websites of lenders or crowdfunding platforms. They are customizable and user-friendly. You can qualify for a term loan even if you have bad credit.
- Invoice factoring: If your business has outstanding invoices, you can use this option to get money immediately. With this option, the factoring company purchases your invoice and credits your account with 90% of the invoice value. It then collects the payment from your client on your behalf by charging a 1–2% factoring fee. The remaining amount will be credited to your account.
Other options include invoice financing, equipment financing, merchant cash advances, microloans, and crowdfunding.
Getting a business loan is not as easy as some may believe. Even if you have a good credit score, there are other factors such as income and experience that can reduce your chances of getting your business loan approved. Even in the event of a business loan rejection, there are still multiple alternative financing options available. For more options after a business loan rejection, visit Piramal Finance to read related articles, like this one, for information and guidance on getting your business loan approved.