Business Loan Rejection
Introduction
Generally, every business in India needs finance for the expansion process. Many businessmen and women take business loans for expanding operations, buying equipment, or managing cash flows. Not all applicants receive business loan approvals, though. For the same loan application, applications are often returned with the bank stating it as rejected. A business owner gets guilty about knowing their mistake later.
Also read: How to Get a Bank Loan for Your Small Business
Top Reasons for Business Loan Rejection in India
- Poor Credit Score: The primary reason for loan rejection is a poor credit score. Banks and other financial institutions like NBFCs consider the creditworthiness of the borrower by reviewing their credit history. A bad credit score indicates a history of missed payments or defaults that the lenders decline to approve the loan. In India, a credit score of 750 and above is usually considered good. It is recommended that business owners should pay attention to their credit scores regularly and develop a plan of action to enhance them.
- Poor Documentation: The second significant reason behind the rejection of most business loan applications is the lack of documentation. A lender needs several documents, such as identification proof, address proof, business registration certificates, and financial statements. Lack of or improper documents may even delay the processing or lead to loan rejection. Every MSME business owner must ensure that all the necessary paperwork is accurate and complete, before submitting the same to avoid rejection of business loans.
- Lack of Business Experience: This means that most loan providers offer loans to established businesses for at least several years. Startup ventures or even less than two years of any business venture face difficulties in business loans by the lenders as these ventures come out to be riskier positions as they haven’t established much track record so far. Businesspersons should also build a consistent business history while seeking large sums of loans.
- Weak Financial Profile: The lender checks the financial health of the business to ensure that you can repay the loan on time without any defaults. If the financial statements are unstable, the loan application is bound to be declined. To improve this, the business should have detailed and accurate financial records and work on profitability.
- Unclear Purpose for the Loan: Lenders need to know clearly how the loan amount is going to be used. An unclear purpose can lead to misunderstanding regarding the intentions of the borrower and your ability to repay it. A business owner needs to give a proper business plan or proposal stating the purpose of a loan and how the business will gain from it. This clarity will eventually create an understanding with your lender.
- Existing Debt: Having too much existing debt can lead to loan rejection. Lenders assess the debt-to-income ratio to understand the borrower’s ability to take on additional debt. If a business already has multiple loans or significant financial obligations, the lender may see it as a risk. Reducing existing debt and managing finances effectively can improve the chances of loan approval.
Also read: The Most Prominent NBFCs Empowering Small Businesses in India
- Industry Risks: Some sectors are considered very high risk from the perspective of lenders, namely small hotels, small-scale plastic manufacturing, etc. Businesses that fall under these industries might get rejected considering market volatility along with low profitability margins. Despite this, while changing the kind of industry undertaken may not always be possible, business owners can actually minimize their risk if they show potential for exercising good financial control and future opportunities.
- Low Credit Utilization: It means the amount of credit used, to the total amount of credit given. High utilization can lower the borrower’s credit score and may show that the person does not have proper financial management. Lenders want borrowers to use credit wisely and maintain low utilization ratios of less than 30%. Hence, by observing the credit usage at frequent intervals and maintaining it would prevent rejection.
- Lack of Collateral: Most business loans offered in India need collateral, that is, either property, machinery, or even other valuable items. In such cases, where the applicant may not be able to provide adequate collateral, the application may be turned down. Alternatively, an applicant can choose an unsecured business loan like a Kinara Capital loan, where any business owner need not pledge any collateral for a business loan.
- Mistakes in the Application Form: Minor errors in the application form can include incorrect information or mismatched details, and hence can become the reason for rejection. Every detail is verified by the lenders; if there’s any kind of incorrect information on it, that can create doubt about the applicant’s credibility. Business owners need to be cautious while filling up the form, review it before submitting it, and so forth.
Conclusion
Getting a business loan in India is not easy, but the knowledge of the main reasons for rejection will better prepare the applicant. It is very essential to have a good credit score, complete documentation, a clear business plan, and a stable financial profile before applying for a loan. When these factors are addressed and a sense of credibility is shown to the lenders, the chances of getting financial support for business growth and development increase.
NBFCs became a viable option for entrepreneurs who may not be given loans by traditional banks. They generally allow easier terms, and processes quickly, making them ideal options for business owners who don’t have a well-established credit history. So, options offered by NBFCs can even be a source of financial support in high-risk industries or for inexperienced business sectors.
