Business expansion requires a substantial amount of capital. A large number of entrepreneurs resort to business loans to obtain financing for their business. However, due to the stringent eligibility criteria, many small business owners do not qualify for a business loan. The rejection rate of business loan applications has also increased significantly in recent years. In order to enhance the chances of loan approval, it is essential to assess the common reasons for rejection of the same. Below are a few reasons why lenders hesitate to business loans to small business owners.
Low Credit Score
Banks and other financial institutions check your credit score before approving your loan application. Your credit score reflects your repayment capacity and financial habits. A good credit score can help you avail a higher loan amount at a reduced interest rate. On the other hand, if you apply for a business loan with a low credit score, you will either have to pay a high-interest rate or your loan application will be rejected. Therefore, it is essential to boost your credit score by clearing outstanding dues before applying for a small business loan.
Inability to pledge collateral
Since a small business loan is a secured loan, lenders will ask you to pledge collaterals against the loan amount. In case you fail to repay the loan, lenders will have complete authority to seize the pledged collaterals. The maximum loan amount will also depend on the value of your collaterals. In case you don’t possess any asset that can be used as loan security, your business loan application may be turned down.
Not Enough Cash Flow
Lenders check the cash flow of the business to ensure the monthly repayment of the loan. Less cash flow at the time of applying for the loan may lead to rejection of the loan application. Poor cash flow is one of the most common reasons for rejection of a small business loan.
Lenders consider some business sectors riskier than others. Financial institutions may hesitate to lend you money if they consider your business sector to be a risky one.
The Age of Your Business
Financial institutions also asses the time period for which your business has survived in the market before approving a business loan. Most lenders issue a loan to any business if it has completed a minimum of three years in the industry. In addition to that, lenders also demand for the last two years of income tax returns to prove the consistent profit of the company. If the age of business is less than three years, your business loan application is likely to be rejected.
Now that you are well aware of most of the common reasons for rejection of a small business loan, ensure that you make a note of all these aspects before applying for a small business loan. Lastly, before availing a loan, it is essential that you read the terms and conditions associated with it carefully.