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8 Reasons Why Your Business Loan Application Was Rejected

  • Highlights

  • Know the importance of your business credit score

  • Why a concrete business plan is essential for your loan approval

  • Know the importance of doing cash flow analysis

  • What creditors look for when sanctioning loans

Business loans can act as a lifeline for your operations when you eye expansion or want to make the most of the opportunity the market presents. 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 to improve on them to secure the business loan eligibility criteria in your next application.

Reasons For Your Business Loan Application Getting Rejected

Here are 8 reasons that can lead to loan rejection:

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 use of 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:

1. Cutting out unnecessary expenses
2. Maintaining proper invoicing
3. 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 huge 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. 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.

Factors to keep in mind when looking for a Business Loan

The 4 types of business loan explained

From time to time, every business needs an external source of finance to fund its needs. While business loans are a convenient and hassle-free source of funds, it is important for small business owners to know which is the right type of business loan for their enterprise. Here, we showcase the 4 types of business loans, and what each of them is suited for, to help you make the best decision for your business.

Types of Business Loan - Infographic

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 are not in a stage to offer tangible assets, you may have to mortgage your personal assets to get the required funding.

7. Not Knowing the Purpose of 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 Loans Explained

8. A Risky Venture

Dominant factors in the economy of a nation play a major 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 problem areas, lets figure out how to solve them quickly. Below are a few tips:

1) 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.

2) Pay off outstanding debts: Lenders check the amount of loan you have currently availed. Paying off other outstanding loan would not only improve your debt to income ratio but also increase your borrowing capability.

3) Improve your tax strategy:Tax exemption can help you reduce the tax burden associated and also 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 which is 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. Note that a loan rejection though discouraging is not the final straw in the survival of a business.

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