Financial Blog

Reasons for Business Loan Rejection & How to cope up

posted on 2019-08-19 08:09:05 by Admin

Reasons for business loan rejection & How to cope up

A business loan is like an adrenaline boost for small businesses and startups. And getting rejected on a business loan is the stuff of financial nightmares. In recent years, the number of approvals on business loan applications has gone down drastically mainly due to the risk attached to these loans. The risk of a loan turning into NPA has made lenders more and more strict and cautious towards a business loan application. Though it’s true that banks and lenders have become a bit rigid regarding terms and conditions of a business loan especially for MSMEs and startups, with proper information and documentation there is no reason why you have to hesitate to apply for one.

Here we enlist a few reasons that can be obstacles in your business loan approval:

1. Poor Credit Score

Lenders evaluate your business credit score as well as your credit score while deciding on your business loan application. In case you have any negative remarks on either of your credit scores, it may directly lead to rejection of your loan application. A good credit score is a must-have for direct approval of your loan application. In case of low credit score either your loan application will be rejected or you may have to end up paying higher rates of interest.

2. Lack of collateral or security

A high-end business loan is a secured loan. These kinds of loans are usually backed by security or collateral. The maximum loan amount that you can avail is also proportional to the value of the collateral. In case your business loan turns NPA lenders have the right to use the security to recover their loan amount. However, in the case of small enterprises and startups, most of these companies don't possess any such assets making it more difficult for them to avail of a high-end business loan.

3. Your overall business transactions or turnover

The overall turnover of your company is one of the most important parameters that come into play while lenders decide on your loan application. The cash flow in your business is evaluated as it indicates your repayment capacity and lenders reject loan applications with poor cash flow as it reflects poorly on your repayment capacity.

4. Age of your business

While sanctioning your business loan application, lenders also evaluate the duration for which your firm or your business has survived in the market. Most lenders look for at least three years of business history to approve your business loan application in one go. Apart from this lenders also ask for two years of IT returns to ensure the profit consistency of the company.

What to do after rejection of your business loan?

  • First of all, try to find out and evaluate why your loan application was rejected. If it is rectifiable, correct it at the earliest and re-apply.
  • Secondly, due to this rejection, your credit score will get a fall. You must work towards building up your credit score at earliest as possible as it will determine your future lending capability.
  • The third step that can be taken is searching for funding options other than a bank loan.