Reasons Why Your Business Loan Was Rejected

Getting a Business Loan is a strategic move most entrepreneurs opt for at some point to accelerate growth and grab opportunities. This is because to scale any company, you need to invest a lot of capital in the business, and a Business Loan is the most feasible way to obtain this capital. The funds raised through a Business Loan can be used for multiple reasons, from starting a venture to expanding your business, addressing working capital needs, purchasing equipment, and more.Sometimes, however, lenders may decline your loan application, which can significantly impact your business. The reasons for rejection of loan applications can vary from case to case.Let's take a glance at some important loan rejection reasons.

Lenders usually give various reasons for the rejection of loan applications. Here are a few common reasons for Business Loan rejection.

Poor Credit History

A poor credit score can be one reason your loan application is rejected. When you apply for a Business Loan, lenders check your business' credit score as well as your credit score. If you or your business has a poor score, it can lead to a rejection of a loan.If the venture is new, lenders only consider your personal credit score while assessing the repayment capacity. This is because your credit score indicates the level of risk you pose to the lender.If your credit score is below 700, there is a high chance that your Business Loan application will encounter several roadblocks.Suppose your business has recently experienced a series of loan application rejections or has missed instalment repayments. In that case, the credit score takes a hit, which can be a reason for your loan application getting rejected. To avoid rejection, check the Business Loan requirements the lender has set beforehand.A good credit score also plays a vital role in deciding the interest rate and loan terms. It helps you get funds at low-interest rates and favourable terms.If your Business Loan application has been declined due to a poor credit score, here are some tips to improve it.

• Carefully review your personal and business credit report and identify areas for improvement.
• Make the repayment of your existing loans on time.
• If you habitually carry forward your credit card balance, it is time to stop. This habit can severely impact your credit score. Develop the habit of paying the Credit Card balance in full every month. It not only helps you improve your credit score but also aids you in reducing interest expenses.
• Avoid making multiple loan applications in a short period, as it can harm your credit score.

Limited cash flow

The absence of a strong cash flow is another reason lenders reject business loan applications. This is because lenders check how much cash the business generates while assessing the loan application. A good cash flow indicates the business' ability to repay the loan on time.On the other hand, if the business has an irregular cash flow or is below the threshold, lenders may decline the Business Loan application.Monitor your business' revenue and expenses closely to avoid rejection of your Business Loan application due to insufficient cash flow.Lenders typically review a company's cash generation from each operation before approving a Business Loan. If there are cash flow gaps or poor cash generation in any of the operations, it may be seen as a red flag and result in the Business Loan application rejection.Quite often, businesses do not maintain their financial statements properly. This, too, can be a reason for rejection.You can simplify this task with the help of accounting software. Tracking of your business' income and expenses aids you in taking proactive measures to avoid financial distresses in the future.

Unrealistic Business Plan

An unrealistic business plan is one of the most common reasons lenders reject a Business Loan application. A business plan contains financial projections, competitive analysis, organisational structure, and growth strategies. You must also mention how to use the new funds in the business plan. It is also essential that your business plan contain information about customers, the industry it belongs to, etc.Lenders may reject a Business Loan application if your business plan lacks details or does not explain strategies clearly. The lender can decline the Business Loan application if your business plan is deemed too risky or unrealistic.On the other hand, a robust business plan gives lenders confidence in your company's ability to repay the loan.

Not Meeting Collateral Requirements

Lenders usually reduce risks by asking borrowers to pledge valuable assets against Business Loans. Collateral is necessary for higher loan amounts and Business Loans with longer tenures.If you choose to pledge an asset as collateral for a Business Loan, it is important to note that the loan amount you receive will not be equal to the total value of the asset. As per guidelines, lenders can offer only 60-80% value of the collateral as the loan amount.Remember, the asset's value you pledge must be enough to cover the loan amount. An inadequate value of the collateral can be a reason for rejecting a loan application, especially if it is a new or a small, home-based business . Lenders generally decline Business Loan applications if your collateral faces challenges like legal conflict, multiple property ownerships, etc.Several traditional lenders require specific collateral for Business Loans. If you do not have the appropriate collateral, your Business Loan application will be rejected.You can avoid loan application rejection by selecting the lender wisely. Choose a lender that offers collateral-free loans . However, keep in mind that collateral-free loans generally have higher interest rates and strict terms.

Too Much Debt

If your business has several active loans, lenders may view it as a negative sign and decline the Business Loan request. Ideally, the debt utilisation ratio of your business should be at or below 30% of the available credit limit. Lenders consider a high debt utilisation ratio as the business's inefficiency in managing credit.At the same time, lenders see debt utilisation that is close to zero as unhealthy. It indicates the business is not taking advantage of its available credit.To avoid rejection of the loan application, it is prudent to reduce your existing debt by making regular payments and avoiding new credit obligations. A strong repayment history helps you raise funds at a reasonable interest rate.

Missing Or Incorrect Documents

When applying for a Business Loan, you have to submit several documents with the loan application form. These documents usually include essential information about your business, such as details of contracts and licenses, financial statements, bank account statements, KYC documents, and more. The documents required for Business Loans vary from lender to lender. Therefore, reviewing what papers the lender is asking for is essential.Failing to submit all required papers can cause a delay in reviewing your Business Loan application. Sometimes, loan applications may even be declined due to inadequate documentation.Hence, before submitting the loan application form, ensure you have uploaded and included all the necessary documents.

Miscellaneous Reasons

• If the lender feels the industry your business operates in is high-risk, they may hesitate to provide you with funds. Industries prone to economic volatility or regulatory uncertainties may face more loan rejections.
• A criminal history of key personnel associated with the business is a big red flag and can be a cause for Business Loan application rejection.
• Lack of enough business track record can be another reason for rejecting your Business Loan application. To qualify for a Business Loan, your business must satisfy the lender's minimum time-in-business requirement.
• Other external factors, such as a change in government policies, geopolitical reasons, etc., can be a reason for your Business Loan application rejection.
• Provide only the correct information about your business while applying for a Business Loan. Business Loans will often be declined due to slight mistakes in the given information.

• Before applying for a Business Loan, determine why you need the loan and how you plan to use the funds.
• Review the lender's basic eligibility requirements. Usually, lending institutions have eligibility guidelines that include the minimum business experience required, minimum revenue needed, and more.
• It is advisable to opt for a lender with whom you already have a good banking history.
• Check the lender’s processing fees for Business Loans.
• Check other important aspects the lender considers while making a loan decision. Usually, lenders look at how much cash the business generates, the age of the business, the credit score of the business and its founder(s), the value of the collateral, the industry outlook, etc.
• Read the agreement of the Business Loan to understand the clauses. Check whether the lender charges a penalty for prepaying the Business Loan.

Also read : How are Aadhaar cards and Business Loans connected?

Generally, lenders approve a loan application after assessing various aspects of the business. Your Business Loan application will be declined if your business does not meet the lender's criteria. Knowing the Business Loan rejection reasons helps you improve in that area and reapply for a loan after a certain waiting period.If you own a small or medium enterprise, you can take advantage of the SME finance options offered by Aditya Birla Capital to address your fund requirements.