Taking a business off the ground is easier said than done. The adage “It takes money to make money,” can’t be any more accurate than while running a business. With the ever-changing business dynamics and increasing competition, it’s almost impossible to run a business without raising funds, the immediate option being a business loan. From purchasing inventory, recruiting employees to maintaining the day to day operations, any business expansion requires capital.
Although there are several ways to acquire capital for your business, most businesses seek out business loans. However, there could be several reasons why a lender or bank could be rejecting your business proposal – from lack of cash flow, insufficient collateral to poor credit score, and more. Here are some reasons why a lender could be rejecting your business loans.
Poor Credit History
A credit score is one of the crucial metrics to assess the creditworthiness of an individual or business. As a part of the due-diligence process, banks tie-up with credit agencies to obtain the credit history as well as a credit score of the individuals and businesses. This helps decide whether to approve or reject the case or ask for further information for queries/clarifications.
Hence, before reaching out to any lender, pull out your CIBIL score and check for any shortcomings in the report. According to CIBIL, 79% of loans are approved to individuals with a score above 750. Correspondingly, for businesses, the Companies Credit Report (CCR) evaluates the credit score on a scale of 1-10, with 1 being the highest score.
As mandated by RBI, you can obtain one detailed credit report, free of charge, once a year, from each credit bureau in India – Equifax, Transunion CIBIL, Experian, and CRIF High Mark.
Once you get the report on hand, look for any errors and get it fixed by raising a complaint to the respective credit bureau. In some cases, your score may be impacted due to erroneous entries in your report. In such a case, you need to raise a dispute so that the bureau can look into it and raise the issue with the respective financial institution.
Irregular Cash Flow
The cash flow of business forms a crucial component of credit underwriting for any lender before sanctioning a loan. Companies with steady cash flow are considered to be a better bet by the financial institutions given the predictability in the repayments.
Regularity in credits and sufficient bank balance to meet any emergency fund requirements give a lot of comfort to the banks. In case cash flow appears to be an issue with the lender, be ready with a solid explanation for the slumps and peaks during different seasons/quarters.
Traditionally, lenders in India have always asked for collateral, especially in case of slightly large ticket loans because they look for tangible security to back up their funds. There are certain government guarantee schemes like CGTMSE which facilitate collateral-free loans of up to one crore for MSMEs, but still, you can be asked to produce collateral or personal guarantee.
The solution here is to either offer collateral or try out other alternative funding methods such as invoice discounting.
Lack of a Business Plan
When applying for a business loan, it is imperative to understand your business and provide a plan accordingly to the lender. It is prudent to have a sound business plan ready to get a loan approved. Your business plan is a sales tool – where you need to sell your business idea to the lender in the best manner.
To begin, you need to understand that banks are in the money-lending business, hence to do so they need to ensure security and stability. A good business plan is both realistic and optimistic. So, ensure that you weigh in all the factors and submit a robust plan accordingly.
For instance, if a business predicts an 8-12% increase in sales, it should ideally base its income projection on an increase of 10%, and lay down what it intends to do to ensure the additional sales.
Multiple Loan Applications
Banks are wary of lending to businesses which have existing debts with numerous lenders. Consequently, every time you apply for a loan, banks enquire about your credit history. Multiple credit pulls lower down your credit score as you are treated as “credit hungry”.
Take a step by step approach and do not apply parallelly to multiple financial institutions in one go. In addition to this, banks may not take your case seriously as they may feel that you are shopping around in the market.
Nature and Size of the Business
Several dominant factors that affect the economy of the country play a critical role in influencing lenders. For instance, banks would be reluctant to fund the transport industry when the fuel prices are soaring. Every financial institution has a list of blacklisted or negative sectors.
While reviewing a business plan, banks will evaluate the nature and size of the business. Banks will also look into the industry risk or safety factor, assess the market conditions before approving a loan. In case your business is operating in a risky or blacklisted industry, the chances of loan approval are quite low. In such a situation, a business can consider other financing options to get a loan.
A Nascent Business
A report by KPMG reveals that the number of startups in India has grown 7-fold – from 7,000 in 2008 to approximately 50,000 by the end of 2018. Due to the massive growth in the start-up ecosystem, it has become even more challenging to get a business loan approved. The reality is that lenders look into the history of consistent revenue and market experience before approving a case.
In such a situation, startups can look for alternative sources of capital, for instance, small business loans, P2P lenders, invoice discounting, crowd-funding, venture capital, and angel investors to get access to cash flow.
Getting your business loan rejected can be a significant setback. However, that isn’t the end of the world. Figure out why the loan was denied in the first place and work towards fixing it.
Remember, you can always reapply, or look for alternative sources of capital to get access to funds.