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A business loan application could be rejected due to many reasons. It is important to assess business loan rejection reasons and find possible solutions so you can improve your chances of getting a loan sanctioned the next time you apply.
Getting a business loan sanctioned can be tricky. There are certain business loan eligibility criteria to be met before applying for the loan. Another factor loan approval depends on is the track record of your business from the revenue generation point of view.
How to know if my loan application is rejected?
A business loan rejection letter will be sent to you if the bank/financial institution rejects your application. All rejection letters usually state a reason why the loan was rejected.
Have a look at a business loan rejection letter sample:
To<Title>. <First name> <Last name>
<Complete address>, <City with PIN code>
Dear <Title>. <First name>,
This letter is in reference to your loan application dated <dd/mm/yyyy>. After going through your application, we are sorry to inform you that your application is rejected.
After a thorough review of your application and supporting documents, we have concluded that your current financials preclude the bank from extending you credit at this time. When your financial status stabilises and the risk exposure is considerably lower, we will happily reconsider your application.
We thank you for applying and trust that we can continue to do business in the future.
What to do if a bank rejects a loan application?
There are several reasons why your loan application was rejected. Let us analyse each reason and find out how to overcome these problems to make sure the application is approved next time. Here are the main reasons you are denied a business loan:
- Not enough cashflow to meet loan repayment requirements:
Banks and financial institutions find out the net cash flow from the books of account to see whether you have a positive or a negative cash flow. If they see that there is less cash coming and more cash going out it is an indication of cash flow shortage. For a lender, weak cash flow means that you might not be able to pay back your loan. When you have a strong cash flow, you can also consider taking a business cash flow loan.
How to boost cash flow?
- Collect all payments on time. Keep a strict follow-up on delayed payments.
- Offer discounts for early payments. This will give you more money for daily cash flow requirements.
- Use electronic payments instead of cheques and Demand Drafts. Electronic payments are faster and are credited in minutes.
- Maintain good relationships with suppliers. This will help reduce cost of your raw materials with time and free up money.
- Poor credit score
Credit score is another main deciding factor for loan approval. Business credit score determine the creditworthiness of an applicant and indicate the level of risk posed by a borrower. Business lenders look at both personal and business credit scores when evaluating applications. If you have defaulted on loan payments in the past, chances are that your credit scores are damaged.
How to increase credit score?
- Pay bills on time. Repaying your loan EMIs and credit card bills is the best way to improve your credit score.
- Keep debt levels to a minimum. Credit card balances, term loans and other credit lines are all liabilities on your credit report. The more loans you take, the more negative is the impact on your business credit score.
- Don’t cancel old business credit cards. Cancelling old credit cards erases the credit history. If the credit history is stable this is a positive point for your loan approval process.
- Lack of collateral
When you apply for a long-term loan asking for a large sum of money banks ask for collateral that can reduce the risk of investment for them. If you provide insufficient collateral in your loan application, then it will be rejected.
Tangible assets, such as real estate, equipment, inventory and vehicles, are popular forms of collateral. Securities like treasury bonds, stocks, certificates of deposit (CDs) and corporate bonds are also used.
How to know whether collateral is adequate for the loan?
- Make sure the collateral value is adequate by calculating the loan to value ratio.
- If you are trading securities check the market value of the security and ensure that the collateral value is adequate.
What else can you do for business loan rejection?
Here are some alternative methods to choose if your bank loan in rejected:
- Opt for loans from NBFCs and MFIs: Business loans are taken to fund a business operation like starting a new project or purchasing new machinery. While most businesses approach banks for business loans, there are other financial institutions like NBFCS and MFIs that offer unsecured loans at low interest rates. Additionally, loans from NBFCs and MFIs have quick approval and disbursement processes along with competent interest rates.
- Find government schemes offering loans: Government has introduced many funding schemes for businesses to boost the availability of credit. Schemes including MUDRA, Stand Up India, CGTMSE, etc., seek to fulfil the credit requirements of MSMEs by giving them easy and affordable credit facilities. Eligibility for any of these schemes means loans at very low interest rates or other government loan subsidies.
- Check for online business loan platforms: There are many new age fintech companies offering business loans at attractive interest rates. They tend to have relaxed eligibility criteria and a quick and easy loan application and approval process.
- Look for alternate forms of funding: Business loans are not the only method of funding for businesses. You can try crowdfunding, venture capital firms or try approaching angel investors.
How to get your business loan approved?
Lender institutions thoroughly analyse all business loan applications to accurately determine a company’s financial health and repayment capacity. The loan application must be filled with utmost care and all the specified supporting documentation should be attached without fail.
Here are some tips to get your loan applications approved:
- Apply for the right loan: There are many financial institutions across India lending business loans. They have different business loan products with different benefits. Choose the right type of business loan and then zero in on a loan product that meets your requirements.
- Read the eligibility criteria carefully: Every financial institution has like the average annual turnover, number of operational years, etc. Read the eligibility criteria and make sure you are satisfying all the requirements.
- Apply for MSME loans: If you are a small business, applying for loans tailored for MSME needs is an easy way to get funding. MSME loans have relaxed eligibility criteria and quick disbursal times.
Finding the right business loan can ease your daily cash flow requirements. While getting a long-term business loan is difficult as there are collateral and other requirements, businesses can always opt for short-term small business loans that have short repayment period.