Top 7 Reasons Why Lenders Reject Business Loan Applications

Wooden blocks with the word loan and businessman

Starting a business is an exciting new chapter of one’s life but also can be challenging, especially when it comes to financial requirements. A steady flow of cash liquidity needs to be maintained to ensure that the business has the required monetary means to make it work. This is not only for new businesses but also for expansion of existing ones. Business loans are a popular method of gaining funds and several aspiring proprietors apply for them.  However, there stands a possibility that these loans might get rejected due to numerous reasons that do not meet their criteria. So to be able to apply for a business loan that is both smooth and successful, it is important to ensure that you have a solid backing and clean records to make sure that it does not get rejected.

What is a Business Loan?

As the name suggests, a business loan is a monetary aid that is given to business owners by either banks or NBFC’s (Non-banking Financial Corporations). Often, people avoid bank loans due to the severity of paperwork and rigidity of rules and contact lenders who will give them a loan with flexibility of interest payments as well as additional benefits such as pre-payment options and many more. To be able to flourish in your venture, it is imperative to do a thorough research on the type of loan you need as well as the advantages it will offer you.

Types of Business Loans

To be able to understand what you need to have to make sure that your loan gets approved, you first need to understand the type of business loans available and with them all the requirements that you will need. This will help you in not getting rejected. Stated below are types of business loans available in the country

  • Invoice financing
  • Loan against property
  • Loans for start-ups
  • Loans for working capital
  • Term loans
  • Loans for equipment purchase
  • Business loans for women
  • Overdraft facilities
  • Business credit card
  • Merchant cash advance loan

Reasons why your Business Loans Can be Rejected

Since your own money growth is heavily dependent on the investments you make such as hiring staff, buying equipment, marketing, etc. it is extremely important that you ensure that the following mentioned hiccups are taken care of before you embark upon the journey of applying for a business loan.

1. Low Credit Score

The first thing a bank or lender will do is to check your credit score. A good financial record will solidify your credibility and make the loan taking process easier. Demonstrating a good credit score directly reflects on an efficient budget management whereas a poor credit score will show a lack of monetary prudence from your end. If your credit percentage is higher than 30% of the amount, this is considered a bad score. A low credit score is one of the main reasons’ loans get rejected by lenders so this should be thoroughly checked by credit rating agencies to make sure this does not happen.

2. Ambiguous Business Plans

Aspiring start-up owners can sometimes become too looped up into the business that they fail to present a concrete business plan. Since business loans often amount to large sums, it is imperative to present your case with utmost clarity so that lenders can understand the plan you choose to adapt in order to pay this amount back to them as per the stipulated time. Factors such as profit margins, present and potential clients, competing with peers and an in-depth knowledge of the industry can help in making a good sales pitch. This, in combination with an introduction to the team, vision along with the type of experience you bring to the table will then further fortify the lender’s trust in you and your loan will be sanctioned. A lack of all this will almost certainly end up in a rejection.

3. First Timers

It is difficult for first time entrepreneurs to showcase a strong credibility for loans. Despite having a strong business plan, education and a strong vision, the lack of experience is what deters lenders. Ideally, alternative funding instruments such as crowdfunding, small business loans offered by the government, grants and private investors will offer some relief with cash flow. Once this is complete and you have some credible experience in the business, you can then apply for a business loan to further grow it.

4. Lack of Collateral

Collateral is one of the main assets a loan-seeker needs in order to allow it to be used by banks and loan lenders against the money they sanction towards your business. In case the borrower defaults at any given circumstance, this asset is then seized and used as a repayment for the same. Assets that can be used as collateral include properties, jewellery, stock holdings, etc. In case any of this is in dispute, owned by multiple partners or lack of any ownership can amount to a straight away rejection of your loan application.

5. A Criminal Background

Despite the fact that you may have established a brilliant business and have all the means to showcase its profitability and success, a grey past could come in the way of fulfilling those dreams. Banks and lenders would be weary of people who have a criminal history record and, in all likeliness,, reject your loan application. So it is important to have a squeaky clean record so your future endeavours are not hampered.

6. Extravagant Debt

The first thing a bank or loan lender will do is conduct a background check to ensure that the borrower in question has no debt on his record. The idea behind sanctioning a loan is the repayment of it with interest and if the applicant has too much debt, bounced cheques or even an undisclosed bankruptcy, the loan will immediately be rejected. To be able to ensure that this does not happen, it is important to clear all such debts and be completely truthful in your application.

7. Lack of Clarity in Purpose

The reason why a loan is applied for, is an imperative factor to consider when seeking a business loan. Despite giving a concrete business plan, where you plan to use the acquired money, needs to be explained in detail. Cash flow could be used for hiring experienced staff, buying machinery and equipment, marketing outreach campaigns or any such requirement. This should be clearly demarcated and the bifurcation of where the money is being used should be explained. Any lack of clarity in this matter could result in a rejection.

The above mentioned seven points are extremely crucial in availing a business loan successfully and furthering your career in your business. To be able to do this, ensure that all the possibilities for a loan rejection are covered and taken care of.

Here’s what you can to for some Damage Control

Now that you already know what you hamper your loan availing process, have a look at the following table to do some damage control for the same and repair your standing.

StepsDamage Control
Step 1Make your bill payments regularly
Step 2Ensure you don’t overuse your credit cards
Step 3For short-term operations, use a flexi loan
Step 4Maintain low debt and pay all EMI’s on time, if any
Step 5Keep a tab on all your business credit reports
Step 6Ensure you correct all defaults in your credit reports
Step 7Business and personal finance should never be entwined

It is a common struggle to generate funds for a business and loans can definitely aid in fulfilling this deficit. To be able to finance a business, be it small, medium or large, these loans will definitely give you the head start you need to flourish and make more money out of the same. Keep in mind the issues that could be averted so that you can make a successful application and manage your business with the same gusto and determination that you started it with.

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