Availing external finance becomes essential for businesses when there are scopes of expansion, or any attractive market opportunity is available needing additional funding. In such instances, a business loan can come in handy. However, availing of the advance right in time can be involve tricky scenarios, leading to approval or rejection of your application for the advance. Keeping these aspects in mind and taking steps on improving them can improve your chances of receiving approval on your loan well within the sought time frame.
Lending institutions assess multiple parameters related to the borrower’s profile to establish credibility and borrowing capacity. Based on these they approve the loan amount sought. We will look out in detail for various critical reasons that can lead to the rejection of your loan application. Further, we will shed light on the necessary steps one can take to overcome such a shortage in parameters for easy approval of business loan.
Reasons Behind The Business Loan Rejection
Consider the following instances in case your business financing application has been rejected or if you are going to apply for the advance to be well-prepared beforehand.
Low credit score
A credit score is a 3-digit number and is calculated based on the credit history that an entity has created. Such history can include loan repayment habits and other credit-related behaviors indicating the creditworthiness and financial discipline of the prospective borrower. It thus depicts the applicant as a reliable borrower carrying low risk.
One is ideally required to hold a credit score of 700 or above to easily avail funding, especially unsecured advances like a business loan. If it is lower than this, chances are that your loan will not be easily approved by the lender. It is thus advisable that you improve on this financial aspect before applying. Taking steps like repaying in time and in full, utilizing under 30% of the available credit, keeping monthly loan liability under 50% of monthly income, and the like can help with credit score improvement over time.
High debts running for the business
High debts in the financial books are often indicative of increased liability of the business. If the revenue is not sufficient to meet these liabilities or is burdened by them beyond a certain point, lending institutions may not be very accepting of your new loan application. It is because this reduces the overall repayment capacity of the applicant and increases the risk of lending for the financial institution.
It would thus be wise if you repaid your existing debts in full before applying for the advance with your selected lending institution. You must also maintain a streak of timely repayment of your past advances to improve your business’s overall borrowing profile.
Issues with your business’s cash flow
Another factor to consider that may affect your chances of loan application approval is the cash flow of your business. A thoroughly done cash flow analysis can reflect if your business is well-posited financially to meet the monthly liabilities after fulfilling the operating expenses or not. If such analysis reflects a reduced flow of cash for repayment purposes, it can mean an overall reduction in your chances of loan approval.
You can, nevertheless, improve your business’s overall cash flow by undertaking a few critical measures. For instance, you can identify unnecessary expenses of the business and cut down on them. You can also follow detailed maintenance of your invoice that should make tracking of your expenses easy and improve control. Further, you can plan on establishing an emergency fund that should absorb a certain degree of risk related to the flow of cash.
Your business is not older than the required vintage
Various lending institutions require your business to be older than a few given years for you to be eligible to avail of the advance. Such vintage of 1, 2, or 3 years ensures that your business is running unhindered and establishes its stability for the purpose of assessment. In case you do not meet the business vintage required by your selected lender, the chances of loan application rejection increase.
As it is not possible to improve on the vintage that your business carries, you can work on improving the credibility of your business and leverage other factors to negotiate for business loan approval. For instance, you can utilize past repayment records of the business, a high quarter and annual revenue, improved cash flow, etc. for the negotiation when your loan application is being processed.
Absence of a definite business plan
In case you are not up with a definite plan for your business’s future growth and expansion, it can affect your chances of loan approval adversely. It is thus crucial that you develop a business plan that sheds light on the future of your business and how you plan to take it forward.
A well-planned out future scope allows the lender to assess where the business is going, the risks associated with it, how you plan to navigate and dampen such risks, and the likes thus defining its prospects. A well-defined business plan often falls on the good books of lenders, improving one’s chances of loan approval.
No clarity on the purpose of financing
If you are not definite about the purpose you are availing the loan for, it’s time to step back in case you are thinking of applying for the advance. A lack of clear purpose for availing the funding indicates poorly planned business prospects, thus dampening your chances of loan approval.
It is thus best that you first be clear about why you are availing of the advance. It can include any of the reasons related to expenditure requirement, from necessary equipment purchase to new product launch, expansion into new markets, and tapping new business opportunities.
Various inherent risks associated with the business also impact your chances of business loan approval. For instance, your business may be significantly impacted by fuel prices, specific markets, possible new opportunities, etc. that would define the risks involved, which can thereby affect your chances of loan approval. Make sure to consider all these factors and work on them before applying for the necessary business finance to improve your chances of easy approval.