Business loans are essential for any business operations especially if it is ready to expand or has many market opportunities available to explore. While availing a business loan may sometimes be tricky, especially if it’s a new business, there are many ways in which it can be easily sought.
Business loan approval considers multiple parameters and a loan application may stand a chance of being rejected in case any of these are not met. The ideal way to manage business loan rejection is to conduct thorough research of the reasons behind it and to look for ways to rectify them. This way, the applicants will be better prepared to make the next business loan application. Let’s understand more about possible reasons for business loan rejections and ways to avoid them.
Common Reasons why your Business Loan May have Been Rejected
Here are some of the top reasons why your business loan may have been rejected:
Poor Credit Score - the credit score of your business is reflective of the creditworthiness of your business. A high credit score indicates good budget management, effective expense controls and responsible handling of debts. If a business has a poor credit score, it most likely lacks financial prudence and appropriate planning.
Tips to Improve this Factor
Before making a business loan application, it’s mandatory for a business to check for its latest business credit score. One of the common reasons for business loan rejection is a high credit percentage in the business’s capital. An ideal credit percentage is something that ranges around 30% of the maximum available credit. Try to work on improving your credit score before you apply for a business loan.
Cash Flow Issues – A business’s cash flow analysis reflects its capability of repaying the loan after considering the operating expenses. Lack of cash flow availability can affect lender confidence in the business.
Tips to Improve this Factor
Here is how a business can work on improving its cash flow:
1. Minimising unnecessary expenses
2. Detailed invoice maintenance
3. Establishing an emergency fund
Heavy Debt Usage - If a business is under excessive debt, potential creditors may look away. This is because the main concern of any lender is the business’s repayment capability. If a lender observes that the business is piled under heavy debt, it could indicate trouble.
Tips to Improve this Factor
With minimal credit balances and timely clearance of past debts, a business can resolve this issue.
Business is New – Before granting a business loan, creditors generally consider the business’s past performance track record and market presence.
Tips to Improve this Factor
As a new business, it isn’t possible to increase your business history overnight. In such cases, it’s better to opt for alternative funding to improve your eligibility. For first-time businesses, it makes sense to consider alternative funding options such as crowd-funding, small business loans from the government, etc. It is important to establish good credibility before making a business loan application.
Absence of Proper Business Plan - It's crucial to design and develop a detailed business plan. Before furnishing all the documents required for the business loan application, the business must conduct a detailed study of all the important market factors.
Absence of Collateral - Investors consider tangible security while investing in any business. Therefore, a business must have a clear picture of the available inventory of assets which can be used as collateral before making a loan application. For businesses which are unable to offer tangible assets, mortgaging personal assets is a good way of getting the required amount of funding.
Lacking Clarity of Purpose – Questions like why is a loan needed, will the loan be used for the purchase of essential equipment, is the business launching a new product, is it renovating the office, etc have to be addressed by the business. Businesses which are not clear about the purpose of loan are less likely to easily procure one.
Business Risk – Some of the major economic factors like fuel prices, inflation, etc play a major role in determining investor confidence and decision-making. For instance, a business which plans to expand its transport business may find it challenging to convince investors about profitability while dealing with rising fuel prices.
Thus, a business must keep itself updated about the key micro and macro-economic factors surrounding its operations and make use of opportunities at the right time.
How to Deal with Business Loan Application Rejection
Once the business knows about the potential reasons why its loan application might be rejected, here are some of how it can be better prepared to deal with it:
1) Improve credit score: The credit score of a business reflects directly on its debt-servicing capacity. Historical debt records allow lenders to calculate the business’s risk profile. Thus, it makes sense to maintain a disciplined payment cycle for all accounts receivables and credit card bills to boost the chances of loan approval.
2) Clear outstanding debts: Lenders verify the loans which a business would have already availed. Any outstanding loans have to be paid off to improve the debt-to-income ratio and improve the borrowing capacity.
3) Adopt a smart tax strategy: Tax exemption allows a business to reduce the overall tax burden and increase total income. Therefore, businesses can consider hiring a professional for ensuring proper tax planning to reflect business profitability in terms of tax return income.
Before making a business loan application, it is important to understand how lender’s think and self-identify any red flags in the business’s credit history. The business should also ensure to have sufficient income to service the loan. After all the necessary information is available, the business will be able to choose the right loan product which is ideal for its needs.
Look at the Silver Lining
A loan rejection, no matter how discouraging, is not the end of the tunnel in the survival of any business.
Rejection of a business loan application can be a good experience for the business to consider various factors that are considered by lenders. This will ensure that the business is better prepared in the next loan application.It may not be a win-win situation for all but businesses can learn from the same and move forward for improved learning and detailed study for the next loan application.