Business loans can act as the pillar of any start-up or help in the expansion of an existing company. Any business requires funding for the purchase of equipment, employee payments, rental expenses, inventory, and managing a number of additional expenses. Lack of appropriate capital can not only have a significant impact on day-to-day working of the business, but also hamper growth and expansion.
Business loans play an important role in growing business and therefore one must understand the common hindrances that may come into picture while securing a business loan in India. This will allow for better planning to source the best short-term business loan. It will also reduce the chances of a loan application getting rejected.
Lending institutions have various eligibility criteria and documentation requirements for assessing if a small business can be granted the loan or not. The small business loan or short-term loan for a business that gets disbursed depends on multiple factors.
Let’s have a look at some of the top factors that prevent you from getting a small business loan at the best possible interest rates:
Poor Credit History
A business’ or borrower’s credit history has a major impact on the outcome of any business loan. Lenders go through your credit reports for understanding your credibility and willingness to make a timely loan repayment. If you have had a history of delayed repayments of loans as per your credit reports, your loan application might be rejected.
Hence, ensure that you repay all existing debts on time to improve your credit score. Having a good credit score plays a crucial factor in supporting your business loan application. Sometimes, businesses may not be able to get loans easily, because of credit issues.
Most lenders consider the credit score and reject a loan application if the score is below 720. If a credit score goes below 700, it is best to focus on reducing any debt before making any business loan or short-term loan application. You can get the help of professional credit repair services like CreditMantri, to understand what’s wrong with your credit score and bring it back on track.
Lack of Complete Documentation
Another common problem that most borrowers face is insufficient documentation as compared to what is expected by banks and various lending institutions. While applying for a business loan, the applicants or business owners must keep all the necessary documents ready.
A lot of times, inconsistent business practices and incomplete records, like poor bookkeeping practices and mixing of personal bills with business, delayed filing of tax returns, etc can lead to loan rejection. Thus, it is advisable to gather all necessary documentation and go through the business loan application before finally submitting.
Absence of a Concrete Business Plan
A business must have a detailed plan, and the owners must stick to that plan. Most small and medium businesses lack systematic and professional planning. If you apply for a business loan with an incomplete or inaccurate plan, there are high chances of facing loan rejection. An ideal business plan must have the company summary, product information, market placement and detailed financials. The loan applicants should be able to explain the business plan to the lending institution for getting a loan application approved.
Multiple Loan Applications
Applying for too many loans at the same time can lead to a red flag in the eyes of the lending institution. Lenders can easily assume that the applicants are in desperate need of funds, and are, therefore, unreliable as far as repayment is concerned. Thus, you must stick to one application at a time for improving the chances of loan approval.
Competition
Apart from qualifying for a business loan, business owners must demonstrate the key reasons why the lender should grant them a business loan and not others. Since India sees a lot of competition, especially in the start-up segment, lenders often pick a few out of the many small business loan applications. Therefore, standing out is the key to getting a loan application approved easily.
Lack of Planning
To make the right financial decisions for a business, it is important to seek advice from experts. Accountants can offer good help with regards to detailed and clean financials. Additionally, businesses can connect to people who have industry experience and expertise in the specific market. It also makes sense to get the right kind of legal advice while setting up a business and making a loan application. A lot of business applications are rejected by lenders because of lack of planning or expert intervention.
Not Exploring Alternatives
Finding the right lender can be a daunting task and this is the reason why applicants may be tempted to sign up for the first lender that they make an application to. Such blind pursuit of a loan provider could be risky. Entrepreneurs should do sufficient research of both traditional and alternative lenders before making the right choice to obtain funds.
Businesses should be careful not to source loans from inconsiderate lenders who do not easily offer a loan when it is most needed. Today, there are many alternatives to traditional loan providers, such as online lending sites, peer-to-peer lending sites, and also a network of friends and family.
Unimpressive Cash Flow
Lenders often avoid granting funds to businesses which reflect insufficient cash flow. Businesses can optimize cash flow by taking certain preventive measures every quarter. You can estimate the ongoing debt service coverage ratio by using net operating income and net annual debt. This will help in understanding how large a loan payment the business can afford.
Lenders look for a rate of 1.35, although 1.0 can also be a good ratio. The higher ratio reflects that the business has got sufficient finances for repaying the loan amount on time. You can also use a business loan calculator to figure out such calculations/ratios.
Conclusion:
Applying for a business loan is very easy, especially if done online. However, to avoid loan rejections, you must know the various problems that an application may face. Always go through all the documentation and processes well in advance. As long as the business financials and plan are well-presented and detailed, there are fewer chances of a loan application being rejected.