Finance management in a small business is a tremendous task. Availability of liquid funds is paramount from starting a new business to maintaining cash flow in an existing one. This is why there are numerous options for a business loan in the market, some of these are specially curated for MSMEs. Of course, this means that if you have to get your loan approved, there are many things to keep in mind – especially how to avoid getting your loan application rejected. Few factors such as your business details, financial records, and loan repayment history play a critical role in a loan application. Here are the Top 7 reasons why your loan may be rejected.
1. Business Plan with Loopholes
For all those aspiring entrepreneurs who have decided to chart their own career path, a strong business plan is the first line of defense in arguing your case with the lender. Often, in haste, people create business plans that don’t quite fit the mark. A good business plan introduces your business to the establishment, a financial plan for what you would use the loan for, and how you plan to retrieve the money back to repay the establishment. Elements like profit margins, potential customers, some of your competitors, and information about the industry itself should be included in your plan. To make the plan a good sale, you may want to include the mission, vision, team introduction, and the experience that you bring into the venture. This will help bring some personality to your plan, and will certainly help the establishment to understand you better.
2. Bad Credit History
Credit history of your company, and of its directors, is also an essential factor in your loan application. If you have missed paying your credit card dues or EMIs on time, it can lead to a low CIBIL score, which will lead to the rejection of your application. Even missing one payment can adversely affect your credit report. Be aware of how you handle your finances, especially in relation to your credit history, impacting your business loan application.
3. Disorganized approach
It is better to be prepared with your financial records beforehand than scramble for these when the application is already underway. This shows your preparedness and allows you to fill any gap that may occur. Usually, lenders check the income statements, cash flow statements, and balance sheets to understand if your ability to repay the loan is impaired or not. It is better to accumulate these statements and provide them on demand, rather than delaying your process. Keeping an organised folder during your loan application process is as important as any other step. They will also require identity proofs of you and your business.
4. Lack of Truthful Disclosures
Be aware that the establishment that provides you a loan will cover all the bases by conducting a background search. They will probably find all financial records, including any declared bankruptcies, debts, and issues arising from bounced cheques. You may want to be truthful at the get-go and give them enough reason to consider you despite your past issues. If these issues are unearthed during their background verification without your disclosure, then your business loan application will be denied.
5. Time in Business
Often, businesses usually run into problems while acquiring a loan when their experience or professional history in the industry seems lacking. Larger banks would look at a perfect business plan but also look at the people applying. If it appears that a team or a sole proprietor does not have enough experience in the industry and may not be capable of running the business as per the forecast, they might reject the loan. Lendingkart is more flexible than banks in this regard.
6. Issues with Collateral
Usually, banks and other established lenders take collateral against a loan. If the borrower defaults, the banks acquire the collateral for the money lost. This can be any high-value item like real estate, house, inventory, machinery, and so on. If there are issues with the collateral, say multiple ownership of property or a legal dispute, then it is a red flag to banks suggesting ineligible collateral. Lendingkart does not take collateral but works on assessing your loan application better by using numerous data points.
7. Criminal History
Last, it is important to note that your past will play an essential role in your loan application. If a person comes with a criminal history, lenders may be compelled to reject the loan due to the lack of trust in the transaction. Therefore, it is important that the applicant either discloses their criminal history with the appropriate reasoning that may cause reconsideration or have another person apply for the loan.
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The best way to move forward with a business loan application is to be organized with your application. With organization and structure comes a preparedness to deal with arising unexpected circumstances. It is also crucial to know who you are getting into business with. Often, banks are quite rigid in their ways. There are many other options in the market that provide flexible, empathic services to those in need of a business loan. To apply for a business loan from Lendingkart, click here.