Reasons for Your Small Business Loan Rejection

Business Loan Rejection
C95NY4 Husband and wife in a consultation. Image shot 2009. Exact date unknown.

Starting and successfully running your own small business is undoubtedly pretty challenging in India. Most small businesses require abundant funding in the initial stages and this is where small business loans come into the picture. If you have applied for a Small Business Loan and got rejected, here are some possible reasons behind the same:

  • Poor Credit Score- Any financial institution will always verify and check the credit report of the company or CCR. This will contain the details regarding the business and tax registration and the profile and credit history of the organization. In case any business has defaulted on loans earlier or there are similar anomalies in the credit report, the loan application may be rejected outright. In only a few cases, financial institutions may consider companies with poor credit scores but the interest on business loans will be very high in these scenarios. This situation can be avoided by repaying dues on time. The personal credit score of the promoter/entrepreneur should also be good and this is another area which should get attention.
  • Incorrect Information/Details- Many companies often find their small business loan applications rejected due to the submission of incorrect business data/information. The lender will check and verify each and every detail about the business in order to ascertain whether there are any chances of fraud. You should avoid mistakes while filling up your application and ensure that all documents required for business loan are prepared and submitted in order to avoid future rejection.
  • Not meeting the eligibility criteria- In many cases, it may be too early for a business to apply for a loan. The business may be in its earliest stages and hence may find it difficult to meet the business loan eligibility criteria. Lenders have well-defined criteria pertaining to turnover, age of the business and other aspects.
  • Lower cash flows- Lenders usually refrain from approving applications of businesses with low/negative cash flows. Healthy cash flows are a must for getting a small business loan approved swiftly.
  • Insufficient collateral- Some lenders may require collateral and while applying for the loan, companies need to furnish details of the same. Inadequate collateral may lead to the loan application getting rejected.
  • Unsuitable Business Plan- Lenders usually shy away from approving loans for customers who do not have good and suitable business plans. If your plans for using the money are unclear, the lender will never approve the loan application.
  • Excessive Credit- In case the applicant has too much credit in the form of other loans, overdraft, lines of credit, credit cards and so on, the application may be rejected on account of high debt exposure and future possibilities of defaults.
  • Applying to Multiple Lenders- If you have already applied to numerous lenders for a small business loan, this may go against you since it will reflect on your credit report.

These are some of the probable reasons for a small business loan getting rejected by lenders. You should take note of the same and do your best to avoid rejection. Always compare lenders and Business Loan Interest Rates before applying in order to find the best possible fit for your needs.