5 Reasons Why Small Businesses Are Denied Loans

Small Business Loan Rejection

Starting a business is a risky decision as it involves a lot of investment of time and money. Most of the small business owners’ eye at a small business loan for starting their business. But many times, it has been seen that small business loan rejection rate is high. The denial of a bank loan can be traumatic for people who have set up a business and are looking to expand it. Before you flounder and wonder what the reason for business loan rejection was, you must find out why your loan was denied.

Key points to take into Consideration

Check your application form and other details

• You must always keep a photocopy of your small business loan form. Go back to your application and see if it is complete in all respects.
• Some banks will tell you point wise what is wrong while others will send you a notice saying your loan has been denied. But it is your legal right to know why your loan was denied.
• Cross check to see whether all the required attachments are in order.
• Check whether all the required information regarding your business has been given in the correct format or not.
• This is very important if the screening is going to be computerized.
• Having checked your application and found it complete in all respects, move on to the other aspects of loan rejection.

Read Also: Complete Guide to a Business Loan

Credit Score

• The first thing a bank will check when you apply for a loan is your credit score.
• If your credit score is wobbly or is not good, the bank will have reservations about lending you money. This is grounds enough for them to reject the loan application.
• Another aspect is your debt utilization is not high enough.
• You are not using your credit limit enough. That makes the banks suspicious of lending you money.
• Conversely, if you are using your credit limit to the maximum, it is again a red flag for the bank.
• If you are using your credit limit sensibly and your credit score is good, then you are a business person with whom the banks will do business happily.

Collateral

• Money is lent against strong guarantees in the form of collateral.
• If your loan is being denied, one of the grounds could be that the collateral you are offering is considered insufficient.
• Collateral should cover the loan, and the bank should consider it sufficient for the small business loan.
• Collateral can be anything of substantial value to cover the risk that the bank is taking in lending you the money.

Loan for a Small Amount

• Processing a mortgage is an expensive job for a bank.
• If the loan you are asking for is very small, the bank may not consider it feasible to process your loan.
• On the other hand, if your account books do not show healthy and regular cash flow, the bank may not consider giving you a loan.
• Many small businesses which depend on seasonal cash flows, wind up.
• The banks do not want a risky proposition like that, and even if they do, they mark the small business loan interest rate quite high.

Read Also: Commercial Loans for Small Business

“Vice” Business

• Many banks that are considered conservative do not want to encourage a business which promotes “vice”.
• Thus getting a small business loan in India from such banks may become difficult.
• They consider your legal betting center as promoting vice and opt out of processing your loan application.
• It would be better to check the bank’s ideology if you are asking for small business loans from such banks.

In most of the cases, below are the 5 Reasons Why Small Businesses Are denied for the Loans

1. As the bank also provides loan for earning some profits in returns, and so mostly they denied to approve a loan for small size business. As it will not fulfill their needs in terms of profit margin.
2. Some new businesses might not have the right blueprint of executing the plan for increasing their business. In such a case, the bank can’t take the risk to approve the loan, as it may lead them to loss.
3. The niche of business also does matter. It’s the prime role of bank to analyse the risk and popularity of the business in the near future. If they will get satisfied with your chosen business plan and future demands, they can approve the loan else probably they may deny your small business loan application.
4. If you are a female and applying for a loan to take your small business to the sky height, your loan application may deny. Unfortunately, the bank has some gender biased experience regarding loan approval and recovering the amount. And with this experience, mostly they denied approving the loan for those small businesses which are being run by a woman.
5. As per the bank loan approval policies, your business should be older than 2 years at least to get the loan facilities. It helps the lender to analyse future growth on the basis of your past growth history. Prior approving the loan, they also look for the client database you have so far. If they will see the J curve in your business growth, they can think twice before denying your loan application for small business.

Concluding Thoughts

No matter what type of business you run, it is disheartening to have your small business loan or Personal loan denied. There are certain things that you must never forget to consider, such as using a small business loan calculator to calculate your loan EMIs. Many banks now have a small business loan calculator that helps you decide your EMI. Knowing EMI is essential; failure to repay the loan may affect your credit score, thereby reducing the probability of further loan approval. It is good to look at all the aspects before applying so that your loan application does not get rejected.

Hence, we would recommend you to choose those niches for your new business which are in trend and also not going out of the market in the near future. It will be helpful to target the potential customers easily which is indirectly help you to make some history of your business. After achieving the same, you will be eligible enough to convince the loan approval department to approve your application for getting a hassle-free loan.

Still, if you face any issue towards getting a loan for your small business, feel free to contact to the toll-free number of your selected banks. You can also leave a comment below. We will try to answer your query by contacting to the experts of loan approval department, registered under RBI.