8 Major Reasons Leading to the Rejection of Business Loan Applications

*Contributed by Satchit Hasabnis.

Are you looking out for a business loan? Have you recently applied for a loan but had your application rejected? Why do you think your business loan application was rejected? This depends on certain factors which you may not be entirely aware about. There could be several reasons why your business loan was denied.

These are 8 major reasons why business loan applications are rejected.

1. Bad Credit Score

Though you are applying for a business loan, your personal credit score does affect your chances of your loan’s approval. This holds true even if the company has been in existence for a while. In case your personal credit score is bad then the financial institution may not trust your financial position much. Thus the bank may hesitate to provide a loan as your repayment history would not be up to par. It is very important to keep your own credit score strong by making regular payments. Review your credit score time and again and take steps to repair it.

2. Volatile Industry

Some industries or areas of business could be considered as risky in nature, by traditional banks and lenders. For instance, hotels and restaurants can be seen as risky to lend or fund as there is a high failure rate involved. If this is why your business loan application gets denied, then try looking out for other financial institutions that lend to the industry your company operates in.

3. Start-up Business or Lack of Vintage

If you want to start a new business, then the banks and NBFCs may not be interested to offer a loan since the business has not yet formed credibility. In similar manner, if the business is in existence but relatively new, then the banks may not rely on it since there would be insufficient business credit history to qualify for a business loan.

Remember that the vendors necessarily do not report your payments to business credit agencies. When you set up an account with a new vendor or supplier, you have to assure that they report your payments to the business credit agency in order to reflect a good credit history on your company.

4. High Debt Utilization

Usually, financial institutions do not want to fund more than 30 to 40 percent of the total credit available to you. If you end up using too much of credit facilities such as personal or business credit cards and have high existing liabilities, then the banks and NBFCs may consider you risky to lend to because of several ongoing debts. In such cases, the financial institutions may think it’s wiser to reject the business loan application.

If you want to escape from such crisis, make sure you do not have too many financial liabilities at the time of applying the loan, or if you have existing loans you should have enough financial strength to repay the old loan and pay off any new loan.

5. Insufficient Collateral or Security

Most traditional business loans are unsecured, but financial institutions may ask for security or collateral in a few cases. If you are unable to meet this requirement or have insufficient security against which funds can be granted, then the loan application can be declined. Do not worry though as there are other ways to fund your business needs. If you are looking for finances to upgrade or purchase equipment, then opt for equipment financing. You can even choose invoice-based funding for your venture.

6. Lack of Cash Flow

Banks and NBFCs would want to know if you have sufficient cash flow to cover the business expenses, repay the loan, and atill have a cushion. Cash flow is the first thing financial institutions will look into when deciding to approve the business loan. If your cash flow is susceptible to irregularity and seasonal slumps, then it is harder to get the loan approved. Poor cash flow is a major hurdle in business failure and getting loans.

If poor cash flow is the reason why your loan application might get rejected, then you can take steps to improve cash management and reduce instances of maintaining sufficient cash flow. Do not let invoices go pending for too long. Use accounting software which will help to draw an estimate of cash influx and outflow. This way, you will understand the cash availability better, plan out the funding requirements, and whom to approach for the loan.

7. Incomplete Documentation and Paperwork

One of the most common reasons for business loan application being denied is the lack of required documents or incomplete paperwork. Sometimes the application form is filled incorrectly or certain sections marked as mandatory are avoided by the loan applicant. Among the supporting documents, most financial institutions ask for three to five years of personal tax returns and business tax returns, a complete business plan for a certain number of months/years, personal and business credit reports, ownership and registration proof, financial statements duly audited by a CA etc.

The lender or financial institution may also want to see leases, licenses, legal documents related to the business, corporate documents, permits, and more. The fix for this problem is to get all the necessary paperwork in order, without which it is impossible to get the business loan approved.

8. Applicant Has Been Guarantor to a Loan Defaulter

If you have applied for a business loan but have been a guarantor to someone who defaulted in his/her loan repayments, then it is likely that your current loan application would be rejected. Why does that happen? It is because the bank or NBFC does not find you credible enough when it comes to taking financial decisions. You may also have to repay or settle the defaulted loan, before which the bank may not otherwise approve any new loan.

One way to stop your loan application for business from being declined because of the above-given reason is to be very careful when you act as a guarantor to a borrower. Only stand as a guarantor if you are sure the loan will be repaid by the borrower.

Beware about the above-mentioned factors responsible for business loan application rejection and make sure you do not make any of these errors before you apply for the loan.

 

Author Bio:

Satchit Hasabnis is a highly qualified Chartered Financial Analyst who has more than 10 years of experience in the industry. He has been associated with global giants like DCB, HSBC, and Caparo Financial Solutions. He has co-founded, Loanbaba, which provides quick and easy loans like Personal loans, Business Loans, Gold Loans etc to people of different economic background.