One of the many things companies don’t want to deal with is rejection, whether it’s for a new project or corporate funding. However, financial institutions are extremely careful when performing credit assessments. They consider a number of factors before approving your loan application.
Therefore, if you do not want to find yourself in a loan denial situation, keep the following points in mind.
1. Bad credit
One of the main reasons for Business loan rejection is a bad credit history. Financial institutions first assess your credit report when you apply for a loan. They look at how many existing debts you have and how much you are paying in EMI. They also check to see if any previous NDEs have been missed. In case of negative records on your report, the lender will reject your application.
However, there are several circumstances in which a bad credit report is not your fault. For example, financial institutions sometimes forget to send the loan closing report to the credit bureaus. In such circumstances, your best course of action is to contact your lender and request that the mismatch be resolved. You can also send the credit bureau a rectification letter along with supporting documents such as a No Objection Certificate (NOC)
2. Low cash
Cash flow is a measure of your company’s liquidity. It tells lenders how much money you have on hand and in the bank. One of the many problems that lenders cannot ignore is lack of liquidity. Suppose you need funds in the range of Rs 25 lakhs. Your company’s financial statements show a healthy profit, but your cash flow shows a negative amount. In this case, it is assumed that your business expenses are excessive or that you are wasting money on things that are not necessary.
To improve your business cash flow, you may consider taking the following steps.
● Sell any assets that are no longer relevant to your business.
● Instead of buying new machines or offices, consider leasing.
● Launching new products will help you increase your income.
● Revise the price of your existing products.
3. Lack of a business plan
Financial institutions require you to submit a well-detailed business plan when you apply for a business loan. They want to know your sales forecasts, expansion plans, and revenue projections for the next five years, among other things. Some financial institutions also require financial statements. So, try to have your balance sheet and profit and loss account audited by an accountant if possible.
You can also seek advice from business advisors or have them review a documented business plan to help with the application process.
4. Multiple Loan Requests
Funding needs in business can arise at any time. And if you don’t plan ahead, you can miss a fantastic opportunity. However, to get funds quickly, one of the most common mistakes businesses make is applying for a loan from multiple lenders at the same time without waiting for any lender to approve or disapprove.
Submitting multiple applications at the same time gives the lender the impression that you are a desperate borrower. Thus, resulting in a loan application rejection.
5. Startups
Financial institutions are reluctant to lend to start-ups. The reason is that these companies have no business credit history. They also lack financial information that would allow a lender to assess the viability of their business. So, if you are just starting your business, you are left with a handful of financing options, a few of which are listed below.
● You can raise funds from private equity firms, venture capital firms or angel investors.
● If you want to start a business in addition to your full-time job, the best option is to apply for a personal loan.
● You can also choose from a variety of government loan programs on the market.
● If nothing else works, consider using your savings or asking friends or family for help. You may also consider forming a partnership company, as your business partner may be willing to invest a significant amount of money in your business.
6. High Risk Business
There are various companies whose performance depends on the economic conditions of the country, government policies, etc. There are also a few businesses that only thrive in a specific season. Financial institutions view these businesses as risky and do not lend to them.
Suppose there is a complete lockdown in the country and gyms and other public facilities are closed. In such situations, do you think the lender will approve you for a loan? The answer is a big NO. And if they do, they will charge a high interest rate on business loans to mitigate potential risks.
To conclude:
Now that you know the factors that influence your business loan approval, you can proceed with your application. Remember that avoiding the above blunders can help you secure funds at an affordable business loan interest rate.
