In India, business houses are in the need of regular working capital to sustain their business. In terms of investments and any expected expansion, a large sum of money is required. Business loans provided by banks come to the rescue during such instances. However, not every loan application is approved. Let us understand, the main reasons for the rejection of a business loan application in India:
Credit Score of the company
- Credit score plays an important role in getting a business loan. The scores display the creditworthiness of the business owner. The banks consider both the business credit score and personal credit scores.
- A credit score reflects- financial history of a businessman, the financial history of his company, tax details of registration, tax returns details, business details, among others. If a company has failed to repay the loans in the past, it will directly affect the credit score, as it will suppress the score which will reduce the ratings.
- The same goes for a personal credit score. Moreover, if a person cannot handle his personal credits, how will he manage the company’s credit? Thus, a low credit score results in a higher chance of rejection for the business loan.
- Inadequate collateral is another reason behind a business loan rejection for growing businesses.
- The lending agency generally needs physical collateral which is provided as a guarantee to them in terms of default on the loan and as part of business loan eligibility.
- However, new, and small businesses might not have any of this to be offered as a guarantee.
- And most would not prefer to put their own house or cars as collateral for a business loan. But the business loan eligibility amount depends on the value of the collateral asset.
- To get a business loan approved, an applicant must provide all the important and necessary information.
- All lenders require documents that include company bank account statements, financial statements, contract details, company, and personal tax returns, leases, if any, legal documents, business plans among other documents.
- Due to the lack of knowledge, a company won’t be able to provide proper, effective, and appropriate documents; this results in the rejection of the business loan application.
Inadequate cash flow
- Lenders will always look at the cash flow which is being generated by the business before they even decide to approve any business loan.
- Commonly, small new companies often struggle with the problem of streamlined cash flows. It is not consistent or might be inadequate to fulfill the business loan eligibility, as businesses are required to pay interest as per the business loan interest rates.
- Knowing the cash flows of the company the lender analyses the repayment plan of the borrower. Thus, new and small businesses must optimize their funding and cash operations efficiently. This not only helps in gaining eligibility for business loans, but also helps in promoting better management and accounting of various business transactions.
Small business loan amounts
- The majority of the small companies apply for a small business loan amount as these businesses do not need big cash funding.
- Small businesses can be managed easily with small funding.
- But, for many lending agencies, a lower loan amount does not have big profit earning opportunities relative to the expected returns.
- Lenders naturally want to go towards funding large projects as the larger the amount of loan, the more profitable it is for the lenders with approximately undergoing the similar formalities of disposing of a loan.
- Hence, the borrowers need to evaluate all the important aspects of a business loan and its impact on the future course of their businesses.
- Also, an owner should check out the business loan EMI calculator to find their monthly credit dues as multiple banks offer loans at a different interest rate
- A comparison should be made based on the requirement and the suitability in terms of Loan EMI and interest payment
The above are various reasons that can result in the rejection of a business loan. Although, it is necessary to understand that a proper loan application may lead to approval for the same. For that, it is crucial to lodge the right documents, adequate collateral security, duly filled loan application and maintain a decent credit score of the company.