When it comes to running a business, one of the most important things to keep in mind is funding. Without the necessary financial resources, it can be challenging to maintain operations, expand, or even keep the business afloat. For many business owners, obtaining a loan can be an ideal solution to their funding needs.
However, it’s not always easy to secure a loan. In fact, many business loan applications are declined for a variety of reasons. On that note, we’ll take a look at some of the most common reasons why lenders decline business loan applications and what steps business owners can take to increase their chances of approval.
Top reasons why lenders decline business loan applications
There are several reasons why lenders may decline a business loan application. Here are some of the top reasons:
- Poor credit score
One of the most common reasons why lenders decline business loan applications is due to poor credit score. This is because a credit score is a measure of an individual’s or business’s creditworthiness. Generally, a credit score of 650 and above is termed to be as a good credit score. And, if the credit score is low, it suggests that the borrower may be a high-risk borrower who is unlikely to repay the loan. It can be caused by missed payments, defaulting on a loan, or having too much debt. For example, a small business owner who has missed several payments on their credit card bill may find it challenging to secure a loan from a bank or other financial institution.
- Insufficient cash flow
Another reason why lenders may decline a business loan application is if the business has insufficient cash flow. Cash flow is the amount of money that a business has available to pay its bills, expenses, and debts. If a business has insufficient cash flow, it may struggle to repay a loan. Lenders want to see evidence of strong cash flow before they approve a loan application. For example, a restaurant owner who has seen a drop in revenue due to COVID-19 may struggle to obtain a loan due to their reduced cash flow.
- Lack of collateral
Collateral is an asset that a borrower pledges as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recover their losses. Lack of collateral for a business loan can be a significant reason why lenders decline a loan application. Without collateral, lenders may see the loan as high-risk and may be reluctant to approve it. For example, a small business owner who does not have any assets to pledge as collateral may struggle to obtain a loan from a bank.
- Limited time in business
Lenders may also decline business loan applications from businesses that have been in operation for a short period of time. This is because new businesses may not have an established track record of success, which can make them a higher risk for lenders. Without a proven track record of success, lenders may be hesitant to approve a loan application. For example, a startup company that has been in business for less than a year may struggle to obtain a loan from a bank.
- Excessive debt
Another common reason why lenders decline business loan applications is if the business has too much debt. If a business has too much debt, it may struggle to repay a loan, and lenders may see the loan as high-risk. Lenders want to see evidence that the business has enough cash flow to repay the loan while still meeting its other financial obligations. For example, a small business owner who has multiple outstanding loans and credit card debts may struggle to obtain a loan from a bank.
Steps to increase the chances of approval of a business loan in India
Here are some steps businesses can take to increase their chances of getting approved for a loan:
- Improve credit score
If a business owner has a poor credit score, they can take steps to improve it. This can include paying off outstanding debts, making payments on time, and reducing the amount of debt owed.
- Increase cash flow
Business owners can increase their cash flow by reducing expenses, increasing sales, and exploring financing options like invoice financing or a merchant cash advance.
- Offer collateral
If a business owner does not have any assets to pledge as collateral, they can explore other options such as a personal guarantee or a co-signer. A personal guarantee option is considered when the business owner agrees to be personally responsible for repaying the loan if the business is unable to do so. While, a co-signer is when another individual with strong credit and assets agrees to guarantee the loan.
- Build a track record of success
New businesses can build a track record of success by demonstrating strong revenue growth, profitability, and customer satisfaction. Business owners can also provide a business plan that outlines their goals, strategies, and financial projections.
- Reduce debt
Business owners can reduce their debt by consolidating loans, negotiating payment plans with creditors, or refinancing existing debt. This can help improve cash flow and reduce the risk associated with excessive debt.
To sum up
To obtaining a business loan in India can be challenging, and many loan applications are declined for various reasons. And, business owners can increase their chances of approval by improving their credit score, increasing cash flow, offering collateral or a personal guarantee, building a track record of success, and reducing excessive debt. By understanding the reasons why lenders decline loan applications and taking steps to address them, business owners can increase their chances of securing the funding they need to grow and succeed.