Rejection is not accepted easily, whatsoever the situation, scenario or condition is. In case of business loan application rejection, it is more likely the same feeling that results in dejection and disappointment. The word ‘NO’ is not always good to hear, and especially if you are applying for any loan product.
When it comes to loans and funding, the lending industry becomes cautious and meticulous in granting loans by following its painstaking tasks and procedures. Therefore, to avoid any business loan application rejection, you can consider these following measures and suggestions:
1. Low CIBIL Score
Bad credit score or low CIBIL score negatively impacts your business loan application and loan gets rejected instantly by the bank. CIBIL score is a 3 letter numeric that should be maintained above 700 out of 900 to avail business loans at low interest rates. People with CIBIL score below 650 or ranging close to 500 or below, tend to face loan rejection quite often. Checking your CIBIL score and getting a credit report is absolutely free of charge at paisabazaar.com. Check it online, download your credit report and start maintaining a healthy CIBIL score to secure your financial future.
2. Lack of Effective Business Plan
Every lending institution shall want to be well aware of the type of business for which you are applying for a business loan. To make your mark, a concrete self-drafted business plan should be ready and well presented at the time of loan application submission. It becomes difficult for banks to sanction loans to business owners or entrepreneurs with no business plan or lacking proper business information. All these reasons add to the dilemma, confusion and risk for the lender in loan sanctioning.
3. Incomplete Application form or Documents
Along with the loan application form, applicants are required to submit the loan documents specified by the lender. All the authentic and requested documents are to be submitted with necessary details to be filled in the application form. No incomplete, missing, false, fake or forged documents are to be submitted with any financial institution. As during the verification process, the possibility of loan rejection is evident.
4. Insufficient Cash Flow or Collateral
Business cash flow is the primary source through which the lender judges your loan repayment capability. Insufficient cash flow loses the bank’s trust in you that further results in loan rejection. Proper cash flow should be maintained by arranging appropriate invoicing and removing additional expenses.
Secondly, not every bank offers unsecured business loans or loans without collateral/security. For startups, business owners and enterprises who want to apply for secured business loans or loans with collateral, it becomes mandatory for them to arrange for sufficient collateral they need to deposit against the loan amount. Again, insufficient collateral arranged by the applicant shall also result in loan rejection. Types of collateral that you can submit include residential or commercial properties (home, office, land, shop, godown, warehouse, etc.), raw materials, stock, inventory, goods, gold, car, equipment, machinery, etc.
5. Startups or Applicants with ‘New to Credit’
‘New to Credit’ people are the customers who have no current or previous credit usage and do not have or maintain a credit/CIBIL score. These customers who want to start their own business face some difficulty in loan approval or witness loan rejection, as banks grade them as high risk applicants. Therefore, startups or applicants who are ‘New to Credit’ or not much familiar with the banking industry should first start using the basic lending products like credit cards and maintain small FDs in their own name. While using credit cards, customers should not maintain a high credit utilization ratio which is more than 30% of the total sanctioned limit.
6. Businesses with High Risks
Lending institutions think thrice before sanctioning loans to businesses with high risks. With high risk we mean the factors that affect the business solely depend on the condition of the nation’s economy. If we consider today’s situation of COVID-19 and related difficulties like lockdown and scarcity of vaccination, etc. It is not feasible for banks or NBFCs to offer lending support to start a gym, salon, restaurant, cinema, travel company, hotel, shopping mall, etc. The reason is simple: that the environmental or economical situations do not permit the start or open these businesses. These types of businesses are considered as high risk ventures by the lender.
Lending institutions like private and public sector banks, Non-banking Financial Companies (NBFCs), Small Finance Banks (SFBs), Regional Rural Banks (RRBs) or Micro Finance Institutions (MFIs) do want to disburse loans to their customers. This feature of loan disbursal is their primary target or business and they shall never want to say ‘NO’ to their customers. There are some set norms and terms set and defined by the RBI; and its we all who need to abide by these regulations for the proper and justifiable functioning of our nation’s banking system.