Starting a business is one of the most challenging and rewarding ventures to undertake. It takes a great deal of money to launch a business, and with commercial lending on the rise, it is ideal to try to obtain business loan financing.
However, it is common for applicants to get rejected by lenders and denied business loans
. Many times the reason for rejection is not the business idea, but rather a mistake on the part of the applicant.
Let’s assess factors that can result in loan rejection.
1. Poor Company Credit Score
When an applicant applies for a small business loan, the lender primarily checks for company credit report (CCR). The CCR has the business registration and tax registration details. It also contains the company’s profile, credit history and retraces the company’s financial journey. Suppose your business has defaulted on loans in the past. This will reflect in its credit score. A low score would explain why the lender rejected your business loan application. Applicant can rectify this by timely repayment of dues.
Also, ensure that credit consumption by is low. Lenders prefer to avoid lending to businesses that already have a lot of debt.
2. Inadequate Cash Flow
A healthy cash flow represents applicant’s repayment capability. Most lenders shy away from lending to businesses with a poor or negative cash flow. A negative cash flow is when expenses on payroll and inventory consistently exceeds the monthly income. Lenders may reject a loan application in such a case.
3. Inadequate Collateral
Lenders extend business loans based on collateral. This is their option to recover their amount in case of default. At the time of the loan application, applicant needs to furnish details of the collateral. It is important to verify whether the collateral matches the lender’s criteria.
4. Too Early for a Loan
The lender may reject loan application if the business is in its early stage. Lenders are hesitant to lend to a business that is yet to establish itself. To ensure repayment, banks and NBFCs want to confirm that your business is making money. Consider alternate sources of financing like crowdfunding or government loans that fund start-ups.
5. Your Business Plan is Not Good Enough
Lenders are wary of lending to a business that has no clear mission. The lenders also consider the potential of the business. They examine the ability to stand ground in a competitive market. They may even assess the time from when the business might start making money. Only then will they agree to sanction the loan.
6. External Factors Not Conducive to Business
Suppose the applicant has a brilliant business plan and a thorough understanding of the market. However, the loan application may still be rejected for reasons beyond one’s control.
For instance, an applicant wants to set up a hotel. The Goods and Services Tax (GST) that will be introduced from July 2017 will have a big impact on the hospitality business. If the initial business plan was to set room tariffs of Rs. 5,000 and above then as per new regulations the applicable tax will be 28%, which is the highest slab. Thus, room rates will shoot up leading to fewer customers to occupy these rooms in the medium to long term. Thus, the applicant will need to re-assess the current business plan for availing loan and avoid rejection.
Borrowers can use this list to avoid facing rejection. Availing a business loan can aid in launching a new company. But the borrower will still have to successfully run the business and payback the lender.