When it comes to lending for business, loan for business is an easy and fast option. Business loans can be taken from banks, NBFCs and other lending institutions.
However, not all loan applications are approved. Especially when you apply for small, medium and small (MSME) loans. Today, we are telling you why loans are rejected to small traders. Let us discuss some reasons:
Bad credit score
The first thing lenders see before approving a loan is their credit score. It tells how the business owners manage the finances of themselves and the business. If the merchant pays the bills and liability on time, then his credit score becomes very high. Therefore, the higher the credit score, the higher will be the chances of loan approval.
But the good news is that even if the credit or CIBIL score is bad, the traders can take steps to correct it. Just pay all the bills on time and use the credit card under control. At the same time, the merchant should also check his credit report and correct all the wrong entries.
Weak cash flow
It is important to have a good business plan for good cash flow. However, without these two, the loan application can be rejected. This is because the lenders want the cash flow of the customer to be good so that he can repay the loan. Only with good cash flow can a business loan be approved.
Business owners can make a budget for their income and liability and follow it strictly. This will give the merchant an idea about his income and expenses. If the business has a weak cash flow and there is a shortfall in working capital, the businessman will have to reduce his expenses and find opportunities to generate business income so that the chances of getting loans increase.
Business vintage and collateral needed
How long the business has been going on, loan lenders also take care of this. Generally lenders ask for 2 years time in the name of stability and profit to give loans. In addition, some lenders ask for certain guarantees such as real estate or machinery so that if the merchant fails to repay the loan then the loan can be obtained for the guarantee. But if the businessman does not want to keep something as a guarantee, then he can take a loan from NBFC. Their lending process is quite simple and fast.
Lack of preparation
Getting a loan is not an easy thing. It is not that you go to the lender and apply for the loan from the loan application. You have to be ready for everything. You have to keep these documents ready before applying for a loan.
– Financial statements and estimates other than bank statements and PNL statements.
– Business plan and cash flow statement
– Credit Reports – Personal & Business
– Tax Returns
– KYC and legal documents – ID proof, address proof, office lease etc.
Risky Business and Lack of Business Value
Given the industry and its nature, some lending institutions consider some businesses as risky. These businesses are real estate, liquor store, bitcoin etc. It is difficult to convince the lenders for these loans. No lender wants to take a risk and they stay away from business ventures whose future is risky.
Apart from this, lenders also stay away from such businesses, whose chances of growth are less. The data is evaluated on the basis of business order books, financial performance and market size. Some lenders only lend to certain business sectors.
One of the major reasons for business loan application being rejected is the excessive usage of credit cards and the rate of credit usage. It is a ratio of equilibrium to boundary. This means how much the merchant is entitled to and how much amount is available for it.
Therefore, if the merchant takes into account all the above mentioned before applying the loan, then the chances of his loan approval will increase to some extent.