Currently, there’s a growing trend where many business owners are pushing their way towards business loans before setting up their business. This is mainly because a business loan caters to their need for a strong initial capital investment where the business owner doesn’t need to worry about the financial resources and can just dive right into the new business venture.
While there is increased popularity of business loans among independent owners, ironically, the number of entrepreneurs who claim these loan policies is poor. The federal reserve of India has reported that out of the total number of entrepreneurs who applied for a business loan, a mere 40% were able to succeed in availing it. Now, a genuine question arises here: what is the reason behind this discrepancy?
One of the key causal agents for this can be traced back to the business loan application process. Many of the first timers often make common mistakes during filling the loan application form, which leads to the disqualification of their loan plea. The general notion among entrepreneurs that the business loan application is only dependent on the applicant’s credit scores or business scales. But the actual process is much more complicated.
So, what is it that one may be doing wrong, which is causing a rejection of his/her business loan application? Let’s elaborate.
What can be the reasons behind the rejection of the Business Loan Application?
When entrepreneurs apply for a business loan, rejection of a loan application is quite common. Many times, it may not be clear to the entrepreneurs as to why their application was rejected? Here are a few common errors on the applicant’s end which may lead to rejection of the application-
- Incomplete paperwork- While it is hard to believe, improper documentation and paperwork by the applicant is a common reason for rejection of a loan plea. A documented proof of the applicant’s eligibility for the business loan is crucial. Lenders or banks have a process of thorough document verification and only after satisfying verification, does the loan gets approved for sanctioning.
- Low scale business loans- It is common knowledge that primary money lenders like NBFCs often prioritize the loan approvals of those applications which demand a higher amount of loan sanctioning as they are beneficial for these lenders in the long run. Thus, an entrepreneur’s plea may also get pushed to the back burner if he/she asks for a meagre sum of the loan. This is a drawback but a fact about business loans.
- Weak business cash flow- This is a crucial perspective for rejection or approval of a business loan because the loan is an investment from the lender’s perspective and one never wishes to make an investment where there is indefinite cash flow. The lender will always choose a business with steadier and transparent cash flow as it makes a promise of a brighter future. That’s why there is a thorough investigation of an entrepreneur’s cash flow before approving their business loan application. Thus, it is important to know that maintaining steady cash flow is the backbone of any successful business.
- Debt- Similar to cash flow, no lender would want to give money to a business that is already in huge debt because it will make the chances of repayment uncertain. A high debt record also creates a bad business reputation in the minds of lenders. Hence, the lenders might reject an individual’s business loan plea if he/she is under large sums of debt.
- High-risk factor- Just like debts, if the entrepreneur has a lucrative but risky business idea, many lenders may back away from loaning capital due to a higher risk of business failure. This belief is mainly monumented on the fear of experimenting with new ideas. Thus, an entrepreneur with such a business layout might find that business financing is difficult. Additionally, lenders might also consider an increased risk of business crashing where the market competition is extremely high.
While all these factors may lead to rejection of the loan application, it is easier to fix the same simply by being attentive and cross-checking your application.
Things to remember while applying for a business loan
Here are some things which one should keep in mind before and during the process of a business loan application:
- Check and check again – This one is for the applicant’s documents. It is important to thoroughly check the documents and ensure that the application form has all the documents which are required by the lender. Here is a list of documents which are required to apply for a business loan:
- Proof of applicant’s credibility- Income tax returns of applicant
- Financial statements of the business’s bank account
- Business cash flow statement
- Credit reports: Both that of applicant’s as well as the applicant’s business
- Certain legitimate documents: License, Business related leases or contracts
- Legal permits or documents if any apply to the business in question.
- Eligibility of the applicant – An often-undermined trait of business loans is the extent of strictness for eligibility criterion. The lending authorities approve the business loan application to only those individuals who fulfil the guidelines of eligibility completely. Any discrepancy in these requirements will lead to the disqualification of the loan applicant. Thus, the individual must go through the complete list of eligibility criterion.
- Collateral – It is an important thing to keep in mind while applying for business loans especially when the lender is a bank because banks always demand collateral from the entrepreneur in exchange for the loan.
- Don’t leave behind any loopholes – As mentioned earlier in the errors of a loan application, the entrepreneur must establish a sound business foundation in terms of the business objective, credit scores, and cash flow before going for a loan application because this will build a good business profile which in turn makes the loan application stronger.
Going through all these pointers and checking all the facts mentioned in the preceding sections will increase the chances of approval of a business loan application. By keeping these points in mind, one can breeze through the business loan application process.