Running a business in India is very tough. The competition is very intense and the profit
margins may also be significantly low at times. There are times when one needs funds
or is in need of some help for a certain amount of time. Business loans are a savior for
these times. But, there are some factors why banks or any other authorized channels
might reject the loan application of companies.
Even though the process is fairly simple, some organizations fail to get business loans
when they require them.
Let us take a look at what are the factors that need to be kept in mind and why
these organizations fail to get loans.
• Low Credit Scores
If the organization is new to the market, it is possible that the credit score might not be
high. In this case, a lot of formal lenders may not prefer to give loans to such
organizations. The credit score of the company also depends upon the credit scores of
the individual founders of the company. Since it is an indication of how they have
handled debt in the past, a credit score must be evaluated very thoroughly before
applying for debt. A credit score ranged from 300-900. A score that is closer to 900 is
preferable. In case of a low credit score, you can always improve it.
• Unrealistic Business Plan
One of the most important factors while applying for a business loan is submitting a
business plan. After submitting your business plan, the lender assesses the feasibility of
the business and decides whether to lend the funds. If the lender feels that the borrower
has stated a plan that is unrealistic and the investment seems to be risky, the lender
might not go ahead with the application. You should always give your lender an
impression that you understand the business well and hence you want to go ahead with
the plan. The lender should be satisfied that the business goals are attainable.
• Lack of Proper Documents
Most of the loan applications get rejected on the desk if they are not properly
documented. The business owners applying for a Home loan in Ahmedabad are expected to attach all the
relevant information and documents with the loan application. The information related to
the income of the individuals, the KYC requirements and the business operation records
are some documents that are required. The profit and loss statements might also be
needed as one of the documents for the loan disbursal for the lender.
• Lack of Collateral
Business loans are generally secured loans. Since these loans have repayment periods
that are very long, they are secured by some collateral. This collateral is generally the
business office or the residential building of the founders. Collateral can also be fixed
deposits, vehicles or machinery etc. The valuation of collateral is done by the lender. If
the lender assesses that the collateral is not sufficient, then the lender may reject the
loan application.
• Industry
Some of the industries in the market are risky and their sustainability depends upon
natural factors. These industries are called risky industries, and the traditional lenders
might have some aversions to investing in the same business. The industries that faced
a setback during the pandemic are some examples of businesses that are considered
risky now and may not get funding as desired.
• Inadequate Loan Requirement
This might be one least known reason to the borrowers. But, not demanding adequate
capital is one reason why loan applications might get rejected. Servicing a loan involves
cost and if the lender does not see much profit in giving the loan, the lender might reject
the same application. The lender may ask you to review your business proposals and
might want you to evaluate your needs again.
• Weak Cash Flows
Business loan lenders need to be affirmed that the loan will be repaid by the borrower.
For this, the borrower needs to be confident in submitting the proposal to the business
lender. One of the primary ways the borrower can do this is by projecting a strong cash
flow. A strong cash flow is an indication that the business is growing and performing
well. A positive cash flow will always have a good impact on the lender. A clear picture of
your business operations has to be given to the lender so that the lender is satisfied that
the loan will be repaid and that disbursing the loan is a good investment.
• External Factors
Apart from the business being risky, there are a lot of external factors that decide the
credit lending in the market. There may be changes in the tax structure in the capital
markets that affect the lending and borrowing in the market. Government regulations
also play a vital role in deciding the lending and borrowing rates etc. The policies change
that directly affect the money in the market and hence the lending and borrowing ratio
also changes with the change in policies.
Conclusion
The above are some factors why businesses face rejection while taking loans.
Businesses have to be very careful while applying for loans as a large number of
applications might also lead to the rejection of business loans. The organization should
maintain the credit score, and report and maintain a good cash flow. These will help to
avail of a loan easily. Also, the documentation and the loan process should be
understood thoroughly. Taking all these steps will ensure that you get a loan timely and
for the capital that you need.