Availability of funds is paramount if you wish to start a new business or expand your existing one. This is where financial instruments like business loans come in handy. They offer you enough liquid capital to grow your business operations without you having to tap into your savings.
However, getting your loan application approved is easier said than done. Usually, lenders consider numerous parameters before extending you a loan. And failing to meet any one of them may result in a rejection. Though it’s not the end of the world, a refusal can reflect poorly on your credit report.
Let’s take a look at some prominent business loan rejection reasons below.
Poor credit history
The credit history of your business indicates its creditworthiness. Having a poor credit score reflects a lack of financial prudence and appropriate planning on your part. Conversely, having a higher credit rating shows the lender that you have responsibly handled all your past debts. Since it’s the first thing lenders take notice of, it makes sense that you improve it.
The best way to bring up your credit rating is to reduce your credit utilisation ratio. Ideally, it should be somewhere around 30%. Additionally, repaying your existing loan EMIs on time is another sure-shot way of boosting your credit score.
Lenders usually consider your past business record while evaluating your loan application to understand whether your business is performing well enough. However, if you’ve started a new business, you may not have any past business records, to begin with.
And it isn’t possible to create a business history overnight. As a result, applying for a loan under such circumstances can lead to rejection, as lenders aren’t sure of your repayment capability. Thus, it’s imperative to build your business credibility first before you apply for a loan.
Too much debt
Having too much debt on your name is a potential red flag. Your repayment capacity is a primary concern of the lender. So when they see you under a massive pile of debt, it’s natural that they shy away from extending you a loan. Even if you somehow manage to get a loan, the lender may charge you higher business loan interest rates on it.
To that end, it’s advisable that you first clear your existing debts before applying for a new one.
Market sentiment also plays a massive role in your loan application’s approval. Lenders pay close attention to the market to which your business belongs. If it’s facing a slump, it indicates that even your business might not be performing too well.
For instance, if you’re in a transport business, a political decision that raises the fuel costs may not bode well for your revenue stream. Therefore, you must keep yourself updated about the market and economic factors surrounding your business before filing a loan application.
Additional Read: Common Hurdles to Tackle While Availing Business Loan
Over to you
Now that you are aware of some common reasons for business loan rejection, you can better evaluate your loan readiness and decide accordingly.
Want to grow your business without worrying about loan rejection? Well, with Tata Capital’s easy business loan eligibility criteria, you’ll never have to sweat over qualifying for loans! On top of that, you get exciting benefits like affordable interest rates, flexible EMI plans, and speedy loan processing.
Apply today and get a loan of up to Rs. 75 lakhs!