Why Are Business Loan Applications Rejected

Rejection is something that no business wants to face. This rejection might be for a new project or for business loans. But, banks and financial institutions have a certain set of criteria that need to be fulfilled before the loan application is processed. There are a lot of factors that are evaluated before the loan is disbursed to the business.

Borrowing credit might be a regular feature for a business, but the credit report and credit health of the business are evaluated frequently before the loans are processed. This might be because of the nature of the business or the risk that is already present in the industry.

Some of the factors that are evaluated before the processing of the loan application are given below.

Read on to find out the reasons for Business Loan rejection and how you can avoid any!

Nature of Business

Some of the businesses in the industry have a high risk. By high risk, we mean they depend upon the policies and regulations that are set by the government. Any change in the policies or the rules and regulations might need a change in the working of these businesses. Seasonal businesses also come under the same category wherein the business would be flourishing only in a certain season of the year. 

Businesses that are dependent on environmental factors for their survival are also risky in nature. They do not have a fixed turnover at any time during their functioning. 

Financial Institutions and banks do not prefer to give loans to such businesses as they are not sure that the loan will be repaid by the businesses. The financial institutions may also charge a hefty interest rate to reduce the potential risks in these businesses.

Such businesses can resort to special schemes that are available for them and apply for a loan under the same.

Credit report

Poor credit history is one of the major reasons why business loans are rejected. Your credit report is one of the first things that financial institutions or banks will assess before granting you a loan. The banks and financial institutions generally evaluate the existing loans that you have, the EMIs that you are paying, and how you manage the same. While reviewing the credit report, the banks and financial institutions will also see if any EMI or any repayment has been missed. If yes, the banks may reject the loan application. 

Sometimes, a negative credit report is not your fault and the lender might forget to send the closure report to the credit bureau. In such cases, you can request the lender to send the closure report at the earliest so that your next borrowing is not affected.

Cash Flow in Business

Cash flow is the liquidity indicator in the business. A positive cash flow statement makes a very good impression about the business and also the fact that it is carried out successfully. Even when the business is doing good, a negative cash flow suggests that the expenditure is more than the income earned in the business.

To increase and make the cash flow statement look good you can

• Revise the pricing of your products
• Increase the revenue by expanding or introducing new products
• Sell any assets that are not useful
• Lease any machinery that is required 

Multiple Applications

Businesses require funds anytime and there is no doubt that the requirement for funds is planned for acquisition before time by almost all successfully running businesses. Businesses make prior plans to acquire funds by applying for loans to banks and financial institutions. However, one mistake that can ruin the business plan is applying to a lot of lenders for credit. Making multiple loan applications can lower your credit score and also make the organisation look credit hungry.

Instead of making multiple applications, you can wait for the lenders to give their approval.

Start-up Companies

Financial institutions and banks are generally hesitant to lend to start-up companies in the market. The reason being they do not have a credit history. Start-up companies lack financial information and hence lenders do not readily process loan applications for them. 

As a start-up, you can try these financing options instead of the regular bank financing 

Raise funds from private equity firms, venture capitalists or angel investors

Apply for a personal loan instead of a business loan

The government is also helping start-ups build their businesses by granting loans and various other schemes

If nothing else works, you can consider using your savings or getting the help of your friends and relatives. You can also think about forming a partnership firm as your business partner may be willing to invest a significant amount of money in your company.

Business Plan

Last but not the least, you should always have a business plan when you apply for a loan. The banks, financial institutions or other lenders will always want to know your expansion plans, revenue planning and sales in the coming years. Some lenders will ask for financial statements when you apply for a business loan. If possible, always attach your financial statements to your loan application, it increases your chances to get the loan from your lender.

Some business advisors will help you to make a proper company plan and increase your chances of getting credit from lenders.

Conclusion

Given above are some of the factors that influence business loan applications. If you take note of these factors and consider making changes according to them, your chances of getting a business loan are increased and you may get through the application process quickly.

If you avoid the mistakes that are given above, you can find affordable loans easily and at attractive interest rates in the market. 

FAQS of Why are Business Loan Applications rejected?

1:How can you overcome a business loan rejection?

Some of the ways you can overcome a business loan rejection are 

1. Improve credit score
2. Clear any outstanding debts
3. Adopt a smart tax strategy

2:Which are the best banks for availing business loans?

Here are some of the banks

• HDFC Bank
• SBI
• ICICI Bank
• Axis Bank
• Citi Bank
• IDFC Bank
• Kotak Mahindra Bank

3:How to apply for a business loan?

There are two ways to apply for a business loan, offline and online

The offline method involves visiting the branch and making a physical application.

The online method involves filling out the application form on the website of the lender.

4:What are business loan eligibility criteria?

The eligibility criteria are as below