Entrepreneurs require a large amount of capital to establish a start-up. Even when a business takes off and begins to grow, it needs extra funds to enhance its operations. There are a lot of financing options that can help entrepreneurs avail the required capital for business expansion. One of the most popular funding options is a small business loan. Business loans help Small and Medium Enterprises (SMEs) to grow and flourish. With the increase in the number of financial institutions and online lenders in recent times, availing a business loan has become comparatively easy. Although business loans are easily available, most financial institutions have stringent eligibility criteria for the same. Due to the strict eligibility criteria, the rejection rate of business loan has also increased in recent years. Therefore, to increase the chances of loan approval, it is essential to assess the common reasons for rejection of the small business loans. Below are some major reasons why small business loans can get rejected.
Low Credit Score
Financial institutions check your credit score before approving your small business loan application. Your credit score reflects your creditworthiness and repayment capacity. Therefore, a good credit score can help you avail a higher loan amount at a reduced interest rate. On the contrary, if you apply for a business loan with a low credit score, you may have to bear a high interest rate or your loan application will be rejected. Therefore, it is important to improve your credit score by clearing outstanding dues before applying for a small business loan.
Inability to pledge collateral
Small business loans are usually secured loans. Thus, financial institutions may ask you to pledge collaterals while availing a small business loan. In case you fail to repay the loan amount within the stipulated time, lenders will have the rights to seize the pledged collaterals. The maximum loan amount that you can avail will largely depend on the value of your collaterals. Therefore, if you don’t hold enough assets that can be used as loan security, your business loan application may be rejected.
Insufficient cash flow
For every entrepreneur, it is important to maintain a positive cash flow of their business. Lenders check the cash flow of the business before approving the small business loan application. If your business has a positive cash flow, lenders may consider you as a low-risk borrower. This will improve your chances of loan approval. On the other hand, poor cash flow may lead to the rejection of your business loan application.
Financial institutions consider some business sectors riskier than others. Therefore, lenders may hesitate to lend you money if they consider your business sector to be a risky one.
Age of the business
Lenders may also evaluate the time period for which your business has sustained in the market. Most financial institutions issue a loan to a business only if it has completed a minimum of three years in the market. Moreover, they may also demand for the last two years of income tax returns to prove the consistent profit of the company. Therefore, if the age of business is less than three years, your business loan application is likely to be rejected.
Now that you have a better understanding of most common reasons for rejection of a small business loan, ensure to take care of all these aspects before applying for a small business loan.
There are certain steps that you can take in order to enhance your business loan approval chances. Some of them are mentioned below:
- Make sure that you have a well-crafted business plan in place. This will not only reflect your seriousness towards your business but also provide the lender a better understanding of the business cash inflow.. Having a comprehensive and solid business plan will enhance the chances of your loan approval significantly.
- It is advisable to boost your credit score before applying for a business loan. A high credit score will make you eligible for a higher loan amount at a reduced rate of interest
- While applying for a business loan, you should compare various loan offers by different financial institutions. This will allow you to settle for a loan that best suits your needs. You should also research the financial institution you are opting for and go through its reviews before applying for a business loan.
- Before applying for a business loan with a specific lender, it is essential that you check your business loan eligibility by using a business loan eligibility calculator. You can also get an estimate of your monthly EMI with the help of an online business loan calculator. This can help you plan your monthly budget wisely.
- Business loans available at Bajaj Finserv Markets come with competitive interest rate and various other lucrative features. Bajaj Finserv Business Loans have simple eligibility criteria and hence, you can avail the desired loan amount in a hassle-free manner.