Introduction:
A business loan usually provides a much-needed boost to accelerate your business. Both banks offer it, and the RBI regulated Non-banking financial institution(NBFC). Yet, availing of a business loan can be a complete process. However, the business loan can simplify the process by avoiding inevitable mistakes.
A business loan can also act as a lifeline for your operations when you have an eye for expansion or want to make the most of an opportunity as the market presents. Even though availing of the loans may also seem tricky for the owners, especially when it comes to first-timers.
However, business loans approvals depend upon various parameters, and a loan stands a chance for rejection if these are not met. The only best way to handle rejection is to research the reasons behind it and then improve. It accordingly helps to secure the business loan eligibility criteria in your next business application.
Reasons For Your Business Loan Application to be Rejected:
Eight primary reasons can lead you to the rejection of a loan. They are as follows:
Low Credit Score: A good credit score means an adequate budget and expense management. But if you have a poor credit score, it often shows a lack of financial prudence. However, before you start applying for a loan, you should check your credit score with reputed credit rating agencies.
It is one of the most common reasons that can lead you to loan rejection. It ensures the use of high percentages of credit. The ideal percentage to keep in mind is 30% of the total credit that is available.
Insufficient Cash Flow: Depending upon your cash flow analysis, it will show your capability in repaying your loan after it is covered by operating expenses. But its operating expenses cover the incidence of lenders. You can also improve your cash flow by:
Cutting out the unnecessary expenses
Maintaining proper invoicing
Setting up emergency funds
Too Many Debts: When your business is in too much debt, it will turn away potential creditors. The primary concern that remains of a lender is repayment. But when a lender sees you piled up under massive debt, it is natural to be a little wary. However, maintaining a low credit business and massive paying away from past debts will help you resolve this issue.
Too Early Into Business: The creditors always look at your past performance records and the market experience to sanction your loan. Also, suppose you're a first-time entrepreneur. In that case, alternative funding channels such as crowd-funding, grants, and small business loans by the government do come in handy. You also need to establish your credibility before you apply for a loan.
Lack of A Concrete Business Loan: It is absolutely prudent to develop a robust business plan. But before presenting the documents which are required for a business loan, you will be able to conduct an in-depth study of the market factors. It will also help you in getting an unbiased and pragmatic consideration of the business possibilities a scenario offers.
Lack of Collateral: Investors look for tangible security to back up their investments. You will also have a clear misunderstanding of the inventory of assets that you will be able to use as collateral before opting for a loss.
Not Knowing The Purpose of The Loan: Why do you need a loan? Is it utilized to purchase essential equipment, develop a new product, or use in renovating your office? If you are not sure of the purpose of your loan, and the lenders are less likely to process your application.
A Risky Venture: The dominant factor in a nation’s economy plays a significant role in influencing investor sentiments and decisions. For example, if you can plan to invest in a transport business when fuel costs are rising. It is not the same as it may not find much interest with the available investors.
However, you need to keep yourself alongside with the help of micro and macro-economic factors. You have political developments surrounding you, and it will also help you grab opportunities that they provide.
Business Loan Application Got Rejected?
Now that you are aware of the problem areas, let’s also figure out how to solve them quickly. Below are a few tips to keep in mind:
Improve Your Credit Score: Your credit score often gives a direct idea about debt servicing potential. Your past debt records can help the lenders to calculate the risk profile associated with the company. However, to maintain a timely payment cycle for accounts receivable, business credit card bills and invoices boost loan-approved chances.
Pay Off Outstanding Debts: The lenders can also check the amount of the loan you have currently availed. But, paying off the other outstanding loan, would improve your debt to income ratio but also helps in increasing your borrowing capability.
Improve Your Tax Strategy: The tax exemption can help you reduce the tax burden associated and have increased your income. You can also hire a professional to ensure proper tax planning as lenders consider your tax return income as a measure of profitability.
But before reapplying, it is essential to consider the lender’s perspective. Are there any red flags in your credit history, or do you even have sufficient income to repay the loan? Do you know how to inquire regarding what matters and what doesn’t? Once you have all the relevant information you need, you will only choose the right business product loan. It should be suitable depending upon your business requirements.
However, it is very common for a business to struggle to keep its head above the water level when the economic scenario takes a dip. Now that a loan rejection through discouraging is not the final straw in the survival of the business.
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