Business can be big or small, but it needs a loan or credit at some point in time. You can take a business loan. A personal loan for business to infuse instant cash in the company is also an option. And a business line of credit is a kind of pre approved business loan. But sometimes, small businesses face denials from banks and financial institutions.
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6 Most Common Reasons for Business Loan Rejection
Let us understand the 6 most common reasons for business loan rejection. By avoiding these mistakes, you can fool-proof your application before presenting it to any lender.
1. Unimpressive Credit History
When you apply for a business loan, the lenders will check your credit history. That is a record of a detailed statement of your previous bill, credit cards, and other credit payments. If you paid all these dues on time, your credibility as business owner increases. If you haven’t maintained a good credit history yet, you can manage it before few months of applying for a loan.
2. Irregular Cash Flow
It isn’t easy to get a business or personal loan for business if your cash flow is not consistent. You should maintain a balance of payables and receivables in such a way that your bank account doesn’t seem week at any point. Keep a strong bank statement with enough cash flow to manage your dues. If you do that, the financial institutions can trust you with their repayment as well.
3. Less Time & Experience in Business
It also matters that how much time you’ve spent in the business for which you require the loan. The ideal experience according to most lenders is 2 years. But those 2 years of experience should be in a profit-making enterprise. So what if you need money to start a new business? Your personal track record, credit history, and collaterals can help you in that case.
4. No Assets for Loan Guarantee
New and small businesses don’t always have an asset like land or real estate as a guarantee. And if your credit history is not strong, banks might hesitate to provide you with a business loan. You can try some NBFCs for a collateral-free loan. You can also apply for a personal loan for business and business line of credit without offering any collateral.
5. Low Debt-Service-Coverage-Ratio (DSCR)
DSCR is a benchmark to compare the cash flow of a business with its dues. A certain DSCR per cent is considered safe by banks to provide loan to your company. This per cent is calculated by dividing the annual net income (NOI) of business by the yearly debts. The result of this calculation should come at least 1.20 or higher for banks to consider your business loan.
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6. Insufficient Paperwork
Whether you are asking for a personal loan or a business loan, your paperwork should be intact. One of the most common reasons for business loan rejection in the first attempt is insufficient paperwork. Note down the complete list of the paperwork required by the lender. Ensure that you have all the necessary documents attached with your application form while applying for the loan.
Author Bio:
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at shiv@moneytap.com.
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