Learn Why your Business Loan Could Get Rejected - Business Loan Blog - Tata Capital

Here's Why your Business Loan Could Get Rejected

Mar 06, 2017

Potential loan seekers are required to fulfill the eligibility criteria set by the lenders. One of the important criteria is the credit score of the business. The Credit Rating Information Services of India Limited (CRISIL) provides a credit rating based on the debt obligations of a business. This rating is a number ranging from 300 to 900. Higher the credit score better will be the likelihood of receiving quick approval on a loan.

However, even if your business has a good credit score, there may be instances when your loan application may be rejected.

Following are five reasons why your business loan application may get rejected despite a good credit score.

1. Guarantor for a defaulted loan

A guarantor is a person who becomes liable to pay off a loan in case the borrower defaults on the monthly payments. If you have become a guarantor for a person who has failed to repay the debt, your chances of receiving an approval are low. This is because the guarantor is responsible for paying off the debt if the borrower defaults. In such a case, financiers perceive you as a less reliable individual, and you, therefore, become less likely to receive a loan approval.

2. Inadequate cash flow

One of the main eligibility criteria for obtaining loan approval is an adequate inflow of capital. This helps lenders identify your ability to repay the loan installments. It is, therefore, important to track payments made towards payroll, inventory, rent, and other expenses. If expenses are higher than the inflow, ensure that such an issue is solved. The best method to solve such an issue is by making timely payments to suppliers, having emergency funds, besides others.

3. Remarks in the credit report

In addition to a numeric score, the credit report also contains comments and remarks. For example, if you do not repay according to the terms of the loan, this will reflect as a comment on your report. Similarly, if you have repaid after the due date, or have missed payments in the past, a comment about the same will be mentioned. Such remarks reduce the chance of a loan approval.

4. Rejection of an earlier loan application

There may be instances in the past where your loan application was rejected. Such rejections in the past have an impact on your present loan application. It is, therefore, important to apply for a business loan only once you are certain that the business has a good credit score. Also, ensure that the turnover of the business meets the lender's requirement so as to avoid any rejection.

5. Limited collateral

Collateral is an asset such as a property or machinery, which acts as security in case of non-payment. The lender has the right to seize ownership of the property if the borrower defaults on the loan payment. If you have a limited or no collateral to offer, the loan application may get rejected. Moreover, if your business is a start-up, you may offer your personal assets as collateral.

The first thing to do after your loan application has been rejected is to identify the reason for the same. You may then work towards correcting the mistake, thereby increasing the chance of receiving an approval for your next loan application.