4 Main Reasons for Rejection of Your Business Loan and How to Fix Them?

“You are rejected”— these three words are enough to panic you! Whether it’s a job, love proposal or a business loan, rejection hurts, and it hurts badly.

While we can do little in case of job or love proposal rejection, we can help you with your business loan rejection. In case of a business loan, there are various factors which can play an imperative role in deciding the status of your application and preventing it from getting rejected.

While the reasons like economic and political are beyond your control, there are some issues which are easy to fix. So, if you are all set to apply for a business loan, look at the following reasons which could lead to rejection of your business loan.

In case, your business loan application is already rejected by the lender, read on to the know the reason for the rejection (in case you don’t know!) and how you can avoid them in the future:

1. 1. Poor Personal Credit Score: Though, it is your business for which you want money, the lender would be interested in checking your personal credit as well to check your eligibility for the business loan. The way you’ve managed your personal credit is a viable indicator of how you would manage your business finances in the future.
      Lenders are interested in those borrowers who have a well-established history of repaying their debts. It means, if you have a low credit score, the lender can reject your business loan application.How to fix it: While it takes months to fix the credit score, you can take a few steps now to show the lender that you are serious about your credit report. First, identify all the outstanding loans and debts along with the charges and fees that you are required to pay. Second, draft a plan to repay all your debts.
      If your outstanding debt is too high than your current finances, you can take a personal loan to repay it. However, make sure you repay your personal loan also otherwise one more debt would get add to your outstanding debt.
   2. Weak cash flow: To understand your financial standing, most lending institutions would consider your business account along with your cash flow statements and projections. In case there is a slew of overdraft charges, and you have a low balance, a lender can reject your business loan application.How to fix it: One way to fix the issue is to create a full-fledged business plan. In this way, you will be able to segregate the necessary expenses from the unnecessary expenditure. You can cut out the unnecessary expenses wherever possible and divert the money towards your business.
      If your customers are not regular towards making payment, you can offer a small discount to those who pay upfront. Though, it means, you would not receive the full amount, it would ensure more frequent payments, which would automatically boost your cash flow.
   3. Improper Documents: Before you apply for a business loan, make sure all your documents are in place. Furnishing wrong or incorrect document/information is one of the common reasons for the rejection of a business loan. Getting a business loan is not only about walking into a bank, filling out the application form and getting approval on a loan as a lender would insist on evaluating your financial standing before approving your loan application and for that, but you would also have to submit some documents.How to fix it: For a business loan, you are required to submit a well-detailed business plan and furnish important documents like income tax returns, bank statements, etc. You should also have a written business plan, copies of relevant legal documents like articles of association, contracts, etc.; with regards to your business.
   4. No Solid Business Plan: Before sanctioning a loan, a lender would be interested in checking your repayment ability. For that, you may require submitting a solid business plan. Without a viable business plan, investors probably refuse to review your loan application. While, the documents like your bank statement, articles of association, etc.; can tell the past or current state, a solid business plan is necessary to know your future plan or whether you would repay the loan or not.How to fix it: Submit an updated and thorough business plan to show your extensive understanding about your market and customers. A business plan is a clear indicator of your goals and gives a proper estimate of your profits to the lender.

   Then there are some industries which are considered risky by lenders and therefore, they can hesitate in extending business loans to them. For instance, the restaurant business is a good example where the profits are highly fluctuating. Find out such lenders who specialise in your industry so that you don’t face difficulty in getting a loan for your business.

2. Also, some lenders ask for collateral security for sanctioning a loan. In case any default in loan repayment, the lender would use the collateral to recover the losses. In those situations where the loan amount is more than the collateral value, the lender can reject your business loan application.

3. To curtail the chances of rejection of your business loan, look beyond traditional banks who have more strict guidelines as compared to non-banking financial companies (NBFCs), who have a lenient process. Moreover, NBFCs are offering loans for businesses for up to Rs 1 crore without collateral or security.

4. Remember…

5. Rejection is God’s way of saying, ‘wrong direction’, and therefore, if your business loan application is rejected by the lender, identify and rectify those reasons.

6. Along with your dedication, hard work and perseverance, your business requires funds as well. And, if you succeed in timing your funds correctly, you are the real winner!