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Reasons Your Business Loan Can Get Rejected And How to Avoid it

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September 28, 2022
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Unsecured Business Loans as are an ideal financial instrument to facilitate the funds required to achieve your business goals.

You can apply for a small Business Loan from a reliable NBFC based on your requirement as they provide unsecured Business Loans that are easily accessible and involve minimal documentation.

A Business Loan approval is based on fulfilment of specific eligibility parameters, and a loan application can be rejected if even one of the parameters is not met.  

Let’s learn the possible reasons for Business Loan refusal and ways to avoid it.

What is a Business Loan?

A Business Loan is a financial instrument that helps you get funds at an agreed upon interest rate and repayment schedule. The interest and the time period may vary as per your eligibility. 

It is used to increase cash flow to finance different things including the daily needs of a business or expansion. It benefits fast-growing businesses, and many loan providers are willing to partner with entrepreneurs. When you follow the right procedure, your loan will be approved. You need to keep the points mentioned below so that your loan application for Business Loans is not rejected.

9 Reasons Why Business Loans Are Rejected

Entrepreneurs may hesitate to take out a Business Loan due to the fear of being rejected. Let’s look at the most glaring mistakes made by Business Loan seekers in India, so you can avoid them while applying for a loan.

Unrealistic Business Expansion Plan

As a Business Loan can go up to Lakhs and Crores, loan providers are interested in knowing more about the repayment plan. You can demonstrate your ability to repay the loan by presenting your current and future business plans.

If your business plan has inaccuracies, there is a risk of losing the trust of loan providers, and as a result, your application could be denied. 

Bad Credit History

The credit history of your company is also a key consideration in your loan application. Your business Loan interest rate would be lowered if you have a good credit score. Clix Capital asks for a CMR score of up to 6 and a CIBIL score of 700 & above to qualify for a Business Loan.

Some simple ways to maintain or build your credit score are as follows:

  • Try to apply for some form of business loan
  • Maintain the debt-to-income ratio at the lowest possible
  • Clear all debts
  • Avoid submitting several loan applications at the same time. If your application is denied, give yourself some time before applying again.

Disorganised Business Loan Application

Many financial institutions ask for a business expansion plan along with legal documents related to the business. If you don’t have these organised in advance, you may suffer the risk of Business Loan rejection.

Insufficient Evidence of Strong Financial Cash Flows

It could be a red flag if you frequently suffer from uneven cash flow or seasonal slumps. Businesses may face revenue issues when there are more expenses than income. Poor income, cash shortages, or lack of talent talented and skilled employees are problems that cannot be solved within a day.

Collateral Problem

Many traditional loan providers require you to deposit collateral to avail online business loan. So there won’t be a quick Business Loan approval for you if you don’t have sufficient collateral or the right type of collateral. In such cases, look for alternative funding sources, such as unsecured Online Business Loans that are collateral free.

Unoptimised Debt Utilisation

NBFCs offer Business Loans to businesses with a low debt-to-income ratio. When you use too many credit accounts, many loan providers may consider you as a risky borrower.

External Factors

Sometimes change in government policies, an economic downturn, a modification in the banking rules, or a change in an industry’s tax rules could make loan providers wary of the industry for a while. It is a rare occurrence.

Yet, you should be aware of external factors affecting your industry and submit your Business Loan application accordingly to avoid rejection.

Inadequate Documentation

You should ensure that you share complete company information along with financial and KYC documents as per the loan application requirement. Once you understand what you need, put all the documents in order and apply.

Criminal History Associated With Entrepreneurs

Your past actions will play an important role in your Business Loan application.

Loan providers may decline Business Loans due to a lack of confidence in the transaction if the applicant has a criminal record. 

When applicants disclose their criminal record with valid grounds, it may lead to a review or a loan application as a co-applicant.

Conclusion

A Business Loan rejection, however daunting, is not the end of the road for your business. You can gain good experience by considering key factors from loan providers to ensure that your business is better prepared for the next loan application.

Refer to this comprehensive guide when you have doubts; especially before you submit any Business Loan application.

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