The entrepreneurs have option to choose from a wide range of business loan products. Likewise, they can avail business loans from a number of sources – nationalized banks, private banks, non-banking financial companies, fintech companies, venture capitalists and peer-to-peer lending platforms. But often owners of small businesses and startups find it difficult to obtain business loan financing. The entrepreneurs can easily increase chances of obtaining business loans by understanding the eligibility criteria for the specific business loan products. At the same time, they also need to understand the common business loan denial reasons to lower the chance of rejection.
Top Business Loan Denial Reasons
1) Poor Personal Credit Score of the Borrower
Most lending institutions assess the creditworthiness of both individual and enterprise borrowers based on the entrepreneurs’ personal credit score. Hence, the entrepreneur must have a very good CIBIL score to increase chances of obtaining personal loans and business loans. It is always important for entrepreneurs to improve their personal credit score to make the business loan denial reason ineffective. Here are a few tips on how to maintain and improve the credit score.
2) Poor Company Credit Score
The lending institutions assess the company credit report (CCR) of the business thoroughly while processing business loan applications. The CCR conveys detailed information about business registration and tax registration, along with the enterprise’s credit history and financial journey. The lenders even check the business’s company credit score to identify if it has defaulted on business loans in past. The lenders always reject the business loan application if the business has poor company credit score.
3) Negative Cash Flow
Often enterprises need business loans to improve cash flow position. But lending institutions assess the business’s repayment capability based on its current cash flow position. If the cash flow position is positive, they consider the enterprise capability to repay the debt on time while meeting other recurring financial obligations. On the other hand, they decline business loans if the enterprise’s cash flow position is negative or poor, i.e., monthly cash outflow exceeds monthly cash inflow. Here are some tips to manage your business cash flow.
4) Short Time in Business
Each enterprise needs time to achieve break-even point and become profitable. Most lending institutions provide credit to enterprises that have recovered the initial cost and started generating profit. When the business is relatively new, lending institutions decline unsecured business loans as it is yet to generate adequate revenue to become profitable. The owners of new businesses and startups must consider alternatives to conventional business loan products.
5) Inadequate Collateral
Most lending institutions allow entrepreneurs to avail both secured and unsecured business loans. The enterprises, which are yet to make money, find it easier to obtain secured business loans than unsecured business loan. But the lending institutions require the business owners to provide adequate collateral and furnish detailed information about the collateral. They reject business loans in case the collateral is inadequate or the details of collateral are not verifiable.
6) Unconvincing Business Plan
While applying for a business loan, entrepreneurs have to submit an elaborate business plan. The business plan includes detailed information about the enterprise’s business models, long-term and short-term goals, operations, marketing strategy, employees, and financial statements. The lending institutions determine the mission and potential of the enterprise based on the business plan. They even reject the business loan application if the business plan submitted by the entrepreneur is ambiguous or overstated.
7) High Credit Risk
The credit risk associated with individual business loans differ. While processing a business loan request, most lending institutions evaluate credit risk based on a number of metrics. Many lending institutions avoid extending credit to enterprises from specific sectors which are volatile or loss-making. However, the credit risk associated with a specific sector varies from time to time. But most lending institutions decline business loan to enterprises from these financially sensitive sectors despite entrepreneur’s good personal credit score and impressive business plan.
On the whole, the lending institutions decline or deny business loans due to a number of reasons. But the denial reason may vary from one borrower to another. Likewise, the denial reason may differ from a specific business loan product to another. Each lender conveys the business loan denial reason clearly by sending rejection letter to borrowers. The entrepreneurs must read the letter sent by lending institutions to understand the exact business loan denial reason.