Planning to apply for business finance to expand your business? While such financing options are highly useful and extremely easy to avail, business owners still struggle to get one simply due to a lack of proper planning. Loan approval does depend upon various parameters which should be met to avoid rejection. Let’s see what the top 5 reasons for small business loan rejection are.
Low credit score
This is by far the most common reason why lenders turn down applications for small business finance. The logic behind it is simple – if you are unable to manage your personal credit, then it’s risky to trust you with timely loan repayment. If a poor credit score is the reason for your small business rejection, take necessary steps to repair it. This would include closing all existing loans and credit, rectifying any discrepancies in your credit report, asking for higher credit limits, paying bills on time, and more.
Additional Read: Top Reasons for Business Loan Rejection in India
Lack of a concrete business plan
This is another major reason for MSME loan rejection. Before you submit the documentation required by your lender, run a thorough market check and identify the political, social, macro and microeconomic factors that might affect your business. Only when you have a pragmatic and unbiased view of your market and industry can you come up with a concrete business plan that increases the confidence of your loan lender.
Weak cash flow
Lenders will also run a cash flow analysis which determines your ability to pay back the loan after you’ve covered all operating expenses. So, insufficient or weak cash flow will naturally affect the confidence of lenders. To avoid loan application rejection, you can improve your business’ cash flow by cutting down on unnecessary expenses, setting up an emergency fund, and maintaining proper invoicing.
Incomplete or faulty paperwork
Though often neglected, incomplete paperwork or submitting incorrect documents is the reason behind the rejection of many business loan applicants. Thankfully, this can be easily rectified. The next time you apply, make sure you go through your lender’s documentation requirements carefully. Double or triple check if needed and ensure the application has been filled correctly. If you don’t wish to spend too many hours on paperwork, you can even seek help from modern FinTech options.
Too high or too low credit utilisation
Normally, lenders want to ensure that you use no more than 30% of the total credit available to you. If your credit utilisation extends this limit, lenders might worry that you will not be able to pay back your loan on time, and therefore, turn down your application.
On the other hand, if your credit utilisation is too low or zero and you have no history of responsible credit repayment, that also poses you as an ambiguous and high-risk loan applicant. Thus, it’s important to monitor your total credit limits and use credit responsibly and reasonably.
Additional Read: Some Reasons Why Your MSME Loan Application May Get Rejected
Now all you need to do is steer clear of the above-mentioned reasons and apply for easy business finance with Tata Capital. Borrow a principal of up to Rs. 75 lakhs with interest rates starting at just 19%. To check all business loan eligibility and documentation requirements.