Key reasons for Business Loan application rejection
Aug 31,2021 CIBIL Score, OMLp2p Loans, Digital Loan, Online Borrowing
Why Business Loan application got rejected?
Getting business loan application rejected doesn't mean it's the end of the road. The most important factor is to understand why loan application got rejected. Banks, Financial Institutions or Lenders usually provides reasons for why they rejected a loan application. They can't approve all loan applications for obvious reasons.
Reasons why Business Loan application are getting rejected
- Credit Score
The most prominent reason for loan application rejection is if the lender believes that applicant credit score to be "too low". The minimum required credit score number will differ depending on the lender and situation. Applicant personal credit score does factor into business loan, even if his company / organisation has been operational for a while. If applicant can't manage his personal credit, the logic goes, how reliable will applicant / co-applicant be when it comes to paying back borrowed money for business loan?
If a low credit score is the key reason, loan applications are turned down, applicant need to review his credit score and take necessary steps to repair it. It's a good idea to understand, what impact personal and business credit score, to understand how applicant are being evaluated. One might be successful business but have damaged his personal credit to build it.
- Weak Business Performance
Many businesses face income issues periodically; however, if applicants business unit has more expenses than revenue, it denotes a red flag. A low income, cash flow disparities and various issues that any loan can't fix are all red flags for lenders / financial institutions. If lenders see that there's no cash / balance for daily operations, it shows that applicant won't be able to make EMI / repayments of the business loan.
- New Enterprise
When evaluating Business Loan application file, most lenders consider previous repayment history and check P&L Statements, Balance sheets and ITRs from the past years. In case of fairly new business, applicant may not have the necessary experience or records to prove his sound financial standing, which may prove to be a hindrance for approval.
- Yearly Turnover doesn't meet minimum Requirements
Often a lender will want a business to meet a minimum turnover each financial year to qualify for a loan approval. This ensures that there's enough cash flow to help the business pay back the borrowed money and at the same time proves that the business is sustainable.
- Excessive Debt Usage
If a business is under heavy debt, potential lenders may look away. This is because the main concern of any creditor is the business's repayment capability. If a lender sees that the business has accumulated heavy debt, it could indicate trouble.
- Business Vintage
Before granting a business loan, lenders normally consider the business's past performance track record and market presence. In case of new business, it isn't possible to build business history overnight. For first-time businesses, it will be a wise decision to look for alternative funding options such as crowdfunding, small business loans offered by the state or central government, etc. It is critical to establish good credibility before applying a business loan.
- Business is Deemed 'Risky'
Some lenders / Financial institutions will consider applicant business as "too risky" to loan to. Agricultural or construction-based businesses are usually considered under "too risky", however this will also depend on each individual lender. In such cases, applicant might have to seek finance through a government grant instead.
How to deal with Business Loan application rejection?
Once the business loan applicant knows about all possible reasons why its loan application might be rejected, here are some of the pointers by which it can be better prepared to deal with it:
- Improve Credit Score
The credit score of a business indicates its debt-servicing capacity. Past debt records allow lenders to evaluate the business's risk profile. Therefore, it makes sense to maintain a meticulous payment cycle for all accounts receivables and bills to improve the chances of loan approval.
- Clear outstanding Debts
Lenders verify the various loans which a business would have already availed. Any unpaid loans have to be paid off to improve the debt-to-income ratio and increase the borrowing capacity.
- Have All Records Correct
Even if business financial records are perfect, failure to provide the proper documentation to a lender can lead to loan rejection. In such cases, one of the first things applicant should do is review the documentation filed with the small business loan application.
- Don't Give Up
Just because loan application has been rejected for a small business doesn't mean that business isn't viable. If loan application got rejected, take it as a learning experience. Analyze the factors that led to business loan rejection and rectify them to overcome those obstacles on next go-around.