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6 Reasons for Your Business Loan Application Getting Rejected & How To Avoid It

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Reasons for Your Business Loan Application Getting Rejected

Business loan rejections are one of the most common problems entrepreneurs and small business owners face daily. But have you ever wondered why your business loan application is getting rejected? Why are business loans denied by bank officials? If your answer is “No,” don’t worry. Here is a detailed post in which you will learn the reasons for business application rejections, how to avoid denial, and possible ways to reapply for the loan. Scroll down to find out more.

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Why Do Business Loans Get Rejected?

Congratulations if you are applying for a business loan. Because if you are applying for a business loan, we know that you are expanding your business and probably starting something new. But to get the business loan, one should meet all the parameters set by the bank officials. Those who fail to meet the standards set by the bank officials may face business loan rejections.

Thus, one needs to know the reasons for business loan application rejections to correct those factors before applying for the loan to avoid the rejections. And to help you with this, here is a list of reasons why your business loans are getting rejected.

The Top 6 Reasons for Business Loan Application Rejection

The top 6 reasons why your business loan application is getting rejected are as follows:

1. Bad Credit or a Low CIBIL Score

Credit, or CIBIL score, plays a significant role when seeking a business loan. Many applicants face instant rejection due to a poor credit score. A CIBIL score is a three-digit alphanumeric score that should be maintained between 700 and 900 to qualify for a business loan. People with a CIBIL score of less than 650, or even close to 500, will be rejected outright.

Thus, if you are applying for a business loan, make sure you check your credit score from the top credit rating agencies. And if you find that your credit score is too low, then try out the possible ways to improve your credit score.

2. Poor Business Plan

Before applying for a business loan, one should adequately explain the business plan to officials. And along with the business loan application, one should also submit a detailed business plan. With a clear plan, they should also explain why they need a business loan, whether it’s for purchasing the materials required for the business, office renovation, or developing a product.

3. Uncompleted Business Loan Application Form

This is the most common mistake that every individual makes while filling out the application form. Filling out the incorrect information or keeping the mandatory sections blank will get you rejected. Thus, ensure you cross-check the entire application multiple times and attach all the necessary documents your bank officials request to pass the loan.

4. Applicants With No Credit Cards

Applicants who are new to credit cards or have no credit cards will easily face having their applications rejected. This is because people with no credit will not have enough experience, and bank officials will consider these high-risk applicants.

To avoid this rejection, people are advised to start using small lending products such as credit cards and maintain small FDs in their names to understand how the bank products run.

5. Inadequate Cash Flow

Business cash flow is the primary parameter that every lender looks into first to know how the borrower plans to pay the bank. If your business cash flow is low or insufficient, then you can easily face rejection there and then. To avoid this problem, you will have to arrange the cash flow appropriately. Some of the most effective ways to improve cash flow are as follows:

  • Unnecessary expenses should be reduced.
  • The invoice must be properly maintained.
  • Emergency funds need to be allocated.

6. Lack of Collateral

Unsecured business loans or loans without collateral or security are not available from every bank. Startups, company owners, and businesses that apply for secured business loans or loans with collateral must plan for adequate collateral to deposit against the loan amount. Also, applicants submitting inadequate collateral will result in loan rejection.

To overcome these issues, residential or commercial properties (homes, offices, land, shops, godowns, warehouses, etc.), raw materials, stock, inventory, products, gold, automobiles, equipment, machinery, and so on are examples of collateral that can be submitted.

How To Deal With Business Loan Application Rejection?

Now that you understand the possible reasons for business loan rejection, let us know how to avoid business loan rejections.

  1. Raise Your Credit Score: Typically, lenders can demonstrate payback details using previous bank credit scores. With the help of their bank credit score, they can determine the borrower’s risk profile and their debt payment history. Thus, to increase the chance of loan acceptance, maintain regular credit card payments and other bills.
  2. Close Outstanding Debts: Before processing the loan, the lenders would check to verify previously availed business loans and how the debts were paid. If they find any debts that are not paid or not cleared, there is a high chance of loan rejection. Hence, make sure you don’t have any outstanding debts, and you have removed all the debts that existed in the past.
  3. Including Tax Exemption: A tax exemption allows a business to reduce its overall tax burden while increasing its total income. As a result, companies should think about employing a professional to ensure effective tax planning to represent corporate performance in terms of tax return income.

Many lending institutions, such as private and public sector banks, non-banking financial companies, small finance banks, regional rural banks, and microfinance institutions, are in the business of lending money for business purposes. However, one must meet the eligibility criteria defined by the officials of the RBI and follow their rules to avail of the bank loan without any rejections.

Now that you have been provided with all the necessary information about business loan rejections. We hope you found this page helpful and learned how to avoid business loan rejections. If you have faced any business loan rejection in the past, do let us know the reasons and how you avoided the same in the comment section below.

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