Constant cash inflow is key to the smooth functioning of a business, irrespective of its size or nature. And because you can’t finance all business operations yourself, getting a business loan is helpful. But when financial institutions reject your loan application, it can be a setback.
But the important thing is to not feel disheartened and understand the reason behind your loan rejection. There are multiple factors that affect the loan approval process and working on them can increase your chances of getting approved. Let’s look at a few reasons for business loan rejection.
1. Poor CIBIL score
Your credit score plays a vital role in determining if lenders will approve your loan request. A poor score causes financial institutions to question your financial responsibility. Lenders consider both your personal and business credit or CIBIL scores while evaluating your application. Here, a CIBIL or credit score, preferably over 700, is considered good by lenders.
2. Low cash flow
Your business cash flow is a strong indicator of your loan repayment ability. When your business has insufficient cash inflow, it causes financial institutions to lose trust in you, resulting in your business loan rejection. You can improve this by creating an emergency fund and cutting down on extraneous expenses.
3. Existing debt
Lenders evaluate your existing business debts and the net income of your company to determine your loan repayment capability. Having multiple debts can turn away lenders as they perceive you to be a high-risk borrower. Make sure you pay your debts on time to avoid business loan rejection.
4. New business
Before approving your loan, financial institutions will look at your business records to analyse its performance. But if your business is relatively new, lenders might be wary of extending funds because of inadequate performance records and non-existent credit history.
5. Insufficient collateral
When you’re applying for secured business finance, depositing collateral against the loan amount is essential. But if you fail to arrange sufficient collateral, the lender will not approve your loan application. It’s important to keep a tab on your business assets that you can offer as collateral.
6. High-risk business
If your business is highly volatile and excessively depends on external factors, like season and other market trends, you will have to change constantly to keep up with consumers’ evolving needs. This can make financial institutions hesitant to approve your application as they deem your business to be at high risk.
Run smooth business operations with Tata Capital
Successfully running a business is not a cakewalk. Rejection, in any form, can be discouraging. But it’s nothing you can’t recover from. Hence, if your lender doesn’t approve your application, understanding these business loan rejection reasons and improving on them can increase your chances of approval.
Are you looking for a business loan to fuel your day-to-day business operations? You can easily avail of a business loan at affordable interest rates from the comfort of your home with Tata Capital. All you have to do is visit our website and click on the ‘Apply Now’ button!