This is a user generated content for MyStory, a YourStory initiative to enable its community to contribute and have their voices heard. The views and writings here reflect that of the author and not of YourStory.

Top Reasons Why Lenders Deny Loans to Business Owners?

Top Reasons Why Lenders Deny Loans to Business Owners?

Thursday April 23, 2020,

6 min Read

One of the best feelings in the world is to start your own business. You no longer work in tedious 9-6 job. You are your own master and no longer have to obey the orders of other people. Now, you make the decisions and do what you feel is the right for your business. However, it also brings a number of responsibilities on your head as well.

Now, you run a business, and you need to make the decisions that are in the interest of your business. Or else you will end up with either incurring huge losses or shutting your business down. In addition, you also need to ensure that your business generates enough revenue every month. This will ensure that you are able to meet all your expenses and pay the salaries of the employees.

That said, many businesses often run out of cash to fund their business operations. When starting a business, they invest all of their savings in the business. Some business owners, in fact, borrow from their friends and relatives. However, after some time, there comes the point where they are left with little or no funds, and there is an urgent requirement for the same. This requirement can be to pay wages or salaries, buy new machinery, or invest in a new opportunity.

In these situations, all business owners look for quick and easy solutions for this need, which is an MSME loan. You can avail a loan for MSME from banks, NBFCs, and online lenders. However, not all loan applications are approved, and business owners granted loans. Due to several reasons, some are rejected.

Let’s take a look at the same to ensure that you have a fast and hassle-free loan disbursement process.

Bad Credit History & Score

Your and business’s credit history and score play an important role in the processing of the loan application. All loan lenders check the credit score of the borrower when processing the application and issuing a loan. Notably, a credit score is a numerical representation of how well you manage your business finances as well as personal ones.

If you pay all your bills on time and pay your liabilities on time, then you are most likely to have a good and high credit score. And with a high credit score, the loan application is more likely to be accepted. However, if you have some debts written off on your name and have not paid all the EMIs and bills on time, your credit score is likely to be low and negative to get a loan application approved.

Now, the good news is that you can take some imperative measures to improve your bad credit score and get access to the loan. All you need to ensure is to pay your bills on time and ensure you don’t over utilise your credit utilisation limit. You can also fetch your credit report and ensure that there is not any wrong entry posted in the same. If there is any, you need to rectify the same by raising an issue with the credit evaluation company.

Negative Cash Flow

Good and positive cash flow is very important in addition to a good business plan. Without any of these two, your business loan application is most likely to get rejected by the loan lender. This is because most lenders require you to have good cash flow so that you can meet all of your liabilities as well as loan payments. You will be sanctioned a loan for business only if your financials are strong enough to pay the liability.

To get a better idea of your income and expenses, you can create a budget. Next, you need to stick to it and always have an eye on where you are spending and from where the money is coming in. In case your business is always in a cash crunch because of weak cash flow, you need to find different ways to cut expenses and increase income. This will increase your chances of getting a business loan.

Business Vintage & No Collateral

How long you have been operating your business is also an important factor, when it comes to availing a business loan from any of the lenders. Most of the loan lenders in India usually ask for at least two years of business vintage. No lenders are willing to offer their financial products to start-ups as they can’t prove their financials. However, a business who is in operations for at least years can offer ITR, bank statement, cash flow, and other such documents to prove its income and loan repayment capacity. It helps in proving consistency as well.

Additionally, some small business owner doesn’t have collateral to hypothecate with the loan lender. Many lenders require collateral as security. In case the borrower is unable to repay the loan, they can sell the collateral to recover their losses. 

Having said that, not many small business owners are in the position to offer collateral. And for those who can offer collateral, are unwilling to do the same as they don’t want to risk their property. So, they find it difficult to get access to funds for their business. Nevertheless, you can avail an unsecured business loan, which doesn’t require you to hypothecate property to avail a loan. You can avail a loan for your small business without providing any security.

Lack of Preparation

You cannot walk to a loan lender, fill the business loan application, and expect to get the funds. You need to prepare for the same. Before going to any loan lender and applying for a loan, you need to ensure the following things:

  • Search the various loan lenders and zero in on the best.
  • Check the eligibility criteria of the lenders and ensure you meet them.
  • Prepare all the documents required, along with the loan application.
  • Prepare a business plan.
  • Ensure you have a positive and high credit history and score.

With the help of all these points, you can ensure that your loan application is not denied and is, in fact, approved in the first go itself.