When it comes financing your business, loans are an accessible and often quick option. You can avail business loans from both lenders and NBFCs. However, not all your loan applications will be accepted, particularly when you apply to lenders. Small businesses in particular face this problem and there are several reasons for it. Let’s take a look at some of them:
1. Bad Credit
Your credit history is one of the first factors that lenders check before issuing you a loan. Your credit score tells lenders how well you manage your finances – both personal and that of your business. If you’ve paid all your bills and other liabilities off on time you’re likely to have a good credit score. So, the higher your credit score, the more likely your loan application is to be accepted.
The good news is that if your credit score is bad, you can take measures to improve it. All you have to do is ensure that you pay your bills on time and get your credit card balances under control (without cancelling it). You can also correct any mistakes you might find in your credit report.
2. Weak Cash Flow
Having a good cash flow requires having a good business plan. Without both, your application is very likely to get rejected. This is because lenders, lenders in particular require you to have a good enough cash flow to meet all your liabilities along with the loan payments. Only then will you be sanctioned a loan.
However, if you can create a good budget based on your income and liabilities, and stick to it, you will have a better idea of your income and expenses. In case you have a weak cash flow and your working capital is always in a crunch, cut expenses and find ways to increase income to improve your chances for a loan.
3. Time in Business and Limited Collateral
How long you’ve been in business is another important factor, when it comes to availing loans from lenders. Usually lenders ask for at least two years worth of tax returns to prove consistent returns and profits.
Additionally, small businesses may not have any collateral – like real estate or equipment- to keep, if they default on a loan. However, many NBFCs give collateral-free business loans to small and medium sized businesses
4. Lack of Preparation
You cannot just walk up to a lender, fill out an application form, and expect to be given a loan. It takes a great deal of preparation. Before applying, you need to have the following documents ready for inspection:
- Your financial statements and projections, including lender statements
- Your business plans
- Your personal and business credit reports
- Tax returns
- Legal documents- Id proof, contracts, leases, licenses and permits
Thus, if you can keep these four factors in mind before applying, your chances of getting approved for a business loan increases a great deal.
