What To Do If Your Business Loan Is Rejected

Every business, whether big or small, requires external capital from time to time when it can’t generate enough cash internally to meet its short-term expenses or long-term expansion plans. These funds can either be secured via equity capital from external investors or through business loans from banks and non-banking finance companies.

Lenders offer a variety of business loans, both with and without collateral, to match the specific requirements of business enterprises. While the actual loan approval process may differ from lender to lender, most banks and NBFCs thoroughly assess a business loan application on certain parameters.

While a large percentage of business loan requests do get the green signal, many a time banks and NBFCs reject applications that don’t meet their criteria. Here are some of the reasons why a lender may reject a business loan application.

Low Credit Score

A lender’s main concern is loan repayment on time and in full, after adding the interest charges and other fees. So, they check several factors before approving a loan. The first such factor is the credit score, which ranges from 300 to 900 and reflects the borrowers’ credit history.

Lenders use the credit score to assess if a borrower can repay the debt. A score of 750 and above is considered ideal for loans. A score below 500-550 makes it virtually impossible to get a loan. Lenders may or may not approve a score between 550 and 750 depending on other factors.

Weak Cash Flows

Borrowers must show a significant positive cash flow when they apply for business loans. Less cash coming in and more cash going out causes cash flow shortages and could even endanger the company's existence.

A negative cash flow is an indication of cash shortages and financial troubles. This might make it harder for the borrower to pay back the loan, which would force the lender to refuse credit.

Outstanding Debts

Borrowers who already have a lot of debt may face rejections for new loans. A sizable amount of outstanding debt may serve as a red flag to lenders regarding the business owner's capacity to make future monthly payments.

Lack Of Collateral

Business loans can either be secured or unsecured. Secured loans require a collateral while an unsecured loan doesn’t. This makes unsecured loans riskier for lenders, and they may reject a loan application of a borrower with a weak credit score, poor cash flows and high outstanding debt.

Impractical Business Plan

Lenders may reject loan applications of borrowers who are not clear about the loan’s purpose or who may seek too little or too much debt that are not in line with the business requirements. Unrealistic business plans or risky ventures often deters lenders.

Steps To Overcome Business Loan Rejection

Prospective borrowers whose loan applications are rejected and who want to reapply should first find out the reason for the rejection. Here are a few steps the borrower can take to ensure the loan application is approved.

• Pay off the outstanding debts and bring down the credit utilisation ratio
• Build a good credit score by timely repayment of loans
• Manage a positive cash flow and cut losses, if any
• Show adequate income proofs to convince the lenders of their repayment ability
• Offer a tangible asset as collateral that covers the lenders’ risk against default
• Prepare a realistic and robust business plan with well-conceived goals and how to achieve those.

Conclusion

Entrepreneurs must have all relevant contracts, leases, licenses, and other legal documentation for the company in order before applying for business loans. It lessens the likelihood that business loans will be turned down. Also, it is critical for borrowers to be open and honest with banks about their prior performance. Giving the lender inaccurate information could lead to rejection.

The first step a borrower whose loan application is rejected should do is figure out the reason and fixing the problem. So, if the credit score is low, the borrowers should take actions to improve it. Additionally, borrowers should submit the necessary papers and ensure they have a steady source of income to fulfil the loan payments.

Most reputed banks and NBFCs such as IIFL Finance do inform the borrowers the reason for declining a loan. Fixing the problem increases the chances of the borrower getting a loan later. At IIFL Finance, borrowers can find out their loan eligibility and avail both unsecured and secured business loans that best suits their requirements.