A business loan getting rejected is not less than a nightmare for the small business owners. If you have applied for a business loan and have faced rejection then be certain that you are not alone. The number of business loan applicants who have faced rejection is much more than the ones who have got approval.
There are many business loan applicants who had to pass through a situation where you get a negative response from the lender and unfortunately most of them are the owners of a start-up business.
In the last couple of years, the number of successful business loan applications has been going down. It is all because of the high risk associated with it. The risk of turning the loan into NPA has made the lenders more restrictive on granting the loan. The banks nowadays have become more rigid with the terms and conditions of a business loan which result in a high number of rejections of the same.
Top 5 Reasons for a Business Loan Rejection
Low Credit Score
Banks generally check the business credit score as well as the individual credit score before taking the lending decision. A good credit score is a must-have for getting a loan approval. Any negative remark on your credit score is likely to fetch a rejection on the personal loan application. The low credit score is the reason for which most numbers of business loan applications get rejected. If you apply for small business Loan with a low credit score either you will have to pay a high-interest rate or your loan application will be rejected. It is recommended to check the eligibility criteria prior to applying for the loan so that such situations can be avoided.
A small business loan is a secured loan. Secured loans like this need to be backed by collateral. The maximum loan amount that can be availed depends on the value of the collateral. The collateral of a business loan can be your home, your office, inventory etc. The collaterals make the lending safer for the lender. In the scenarios when a borrower becomes unable to repay the loan, the lender will have the right to sell the collateralized asset in order to refund the lent amount. If you are a have started your business newly and don’t possess any of such asset that can be used as a loan security, your business loan application may be turned down.
Not Enough Cash Flow
The cash flow of a business is one of the most important things checked by the lender in the first place. The cash flow of the business is checked to ensure the monthly repayments of the loan. Unfortunately, many of the business loan providers deny a loan to a start-up business because of the less cash flow at the time of applying for the loan. A poor cash flow is a major reason for business and knowing the fact, most of the banks show a red flag if your cash flow is not up to the mark.
Some sectors of business carry more risk than the others. Though your business may be running well if the sector of your business comes under that risky zone, the lender may hesitate to lend you money. Many a time it is evident that a business loan is getting rejected just because of the industry. Restaurants are a good example of a risky industry because of the high competition. In such scenarios, where you understand the fact that the sector of your business is a risky one, you are to search for the lenders who specialize in your industry.
The Age of Your Business
The duration of time which your business has survived in the market is also evaluated while sanctioning a business loan. Most of the lenders issue a loan to any business only if the business has completed a minimum of three years of functioning in the industry. Most of the lenders demand for the last two years of income tax returns to prove the consistent profit of the company. The minimum of three years in business is one of the business loan eligibility criteria and if your age of business is less than that, your business loan application is likely to be rejected.
Smart Steps to Take When You Have Faced a Rejection
Getting a rejection when you need a business loan most can be frustrating but this can never be an end. There are a few steps that one can take to minimize the effect of the rejection.
First of all, you are to find out the reasons for rejection. If the reason for which the loan has been rejected is a correctable you then you should better correct it at your earliest and apply again.
Secondly, as a result of rejection, your credit score is certain to get a fall. You are to rebuild your credit score before you apply for the loan. You are work on both personal credit score and business credit score simultaneously.
The third step that can be taken is the searching for funding options other than a bank loan. There a number of funding options available other than traditional bank loans such as crowdfunding, venture capital, angel funding, self-funding etc. One can even take a loan from family and friends too.
As mentioned at the beginning, the number of rejected business loan applications are much more in number than the successful ones. If you want your loan application to be a successful one, you are to prepare yourself and your business well so that there is so scope left for the lender to say ‘NO’ to your application.