Business loans can act as a lifeline for your operations when you eye expansion or want to make the most of the market's opportunity. Though availing these loans may seem tricky for owners, especially first-timers, it's not so.
Business loan approval depends on various parameters, and a loan stands a chance of rejection if these are not met. The best way to handle rejection is to research the reasons behind it and improve on them to secure the business loan eligibility criteria in your next application.
Reasons for your business loan application getting rejected
1. Low credit score
A good credit score reflects effective budget and expense management. If you have a poor credit score, it shows the lack of financial prudence on your part. Before applying for a loan, you must check your score with reputed credit rating agencies. One of the most common reasons for loan rejection is the using a high percentage of credit amount. The ideal percentage is approximately 30% of the total available credit.
2. Insufficient cash flow
Your cash flow analysis shows your capability of repaying your loan after covering operating expenses. Insufficient cash flow affects the confidence of lenders. You can improve your cash flow by:
- Cutting out unnecessary expenses
- Maintaining proper invoicing
- Setting up an emergency fund
3. Too much debt
If your business is in too much debt, it will turn away potential creditors. The primary concern of a lender is repayment. When a lender sees you piled under massive debt, it’s natural to be a little wary. Maintaining low credit balances and paying away past debts will help you resolve this issue.
4. Too early into business
Creditors look at your past performance records and market experience to sanction your loan. If you are a first-time entrepreneur, alternative funding channels such as crowd-funding, grants, and small business loans by the government are handy. However, you need to establish your credibility before applying for a loan.
5. Lack of a concrete business plan
It's prudent to develop a robust business plan. Before presenting the documents required for business loans, you should conduct an in-depth study of the market factors. This helps you get an unbiased and pragmatic consideration of the business possibilities a scenario offers.
6. Lack of collateral
Investors look for tangible security to back up their investments. You must have a clear understanding of your inventory of assets that you can use as a collateral before opting for a loan.
If you cannot offer tangible assets, you may have to mortgage your personal assets to get the required funding.
7. Not knowing the purpose of the loan
Why do you need a loan? Is it for purchasing essential equipment, developing a new product, or renovating your office? If you are not sure of the purpose of your loan, lenders are less likely to process your application.
Additional Read : The 4 types of Business Loan explained
8. A risky venture
Dominant factors in the economy of a nation play a significant role in influencing investor sentiments and decisions. For example, if you plan to invest in a transport business when the cost of fuel is rising, the same may not find much interest with the available investors.
Hence, you need to keep yourself abreast with the micro and macro-economic factors and political developments surrounding you and grab opportunities provided by them.
Business loan application got rejected? Here's what you can do
Now that you are aware of the problematic areas, let’s figure out how to solve them quickly. Below are a few tips:
- Improve your credit score: Your credit score gives a direct idea about debt servicing potential. Past debt records help lenders calculate the risk profile associated with your company. So, maintaining a timely payment cycle for accounts receivable, business credit card bills, and invoices boost loan approval chances.
- Pay off outstanding debts: Lenders check the amount of loan you have currently availed. Paying off other outstanding loans would not only improve your debt to income ratio but also increase your borrowing capability.
- Improve your tax strategy: Tax exemption can help you reduce the associated tax burden and increase your income. Hire a professional to ensure proper tax planning as lenders consider your tax return income as a measure of profitability.
Before reapplying, it is helpful to consider the lender’s perspective - are there any red flags in your credit history, and do you have sufficient income to repay the loan? Enquire about what matters and what doesn’t! Once you have all the relevant information at your disposal, you will be able to choose the right business loan product suitable for your business needs.
It’s common for a business to struggle to keep its head above the water when the economic scenario takes a dip. However, note that a loan rejection, though discouraging, is not the final straw in the survival of a business.
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