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It is common for business loans to get rejected. Getting your application rejected doesn’t mean it’s the end of the road for you. The most important factor is to grasp why your application got rejected. Banks and alternative establishments generally offer reasons for why they rejected a loan. They can’t approve all loans for obvious reasons.
One of the most common reasons for loan rejection is if the lender deems your credit score to be “too low.” The magic score number will differ depending on the lender and situation. Your personal credit score does factor into a small business loan, even if your company has been in business for a while. If you can’t manage your personal credit, the logic goes, how reliable will you be when it comes to paying back a business loan?
If a low credit score is the reason you are turned down, review your score and take steps to repair it. It’s a good idea to brush up on what goes in to your personal and business credit score, too, so you understand how you are being evaluated. If you have a successful business, but had to damage your personal credit to build it, you’re not alone. Take heart: there are more options out there for you than ever before.
Many businesses have income issues from time to time; however, if your business has more expenses than income, it denotes a red flag. A low revenue, cash flow gaps and different issues that a loan can’t fix are all red flags for lenders. If lenders see that there’s no cash for everyday operations, it shows that you won’t be able to make repayments on a loan.
When assessing your Business Loan application, most lenders consider your repayment history and take a look at your P&L Statements and ITRs from the past years. If you are a fairly new business, you may not have the requisite experience or records to prove your sound financial standing, which may prove to be a hindrance for approval.
In this case, you can contact other channels such as small business loans through various government schemes, or crowd funding.
More often than not, a lender will want a small business to meet a certain minimum turnover each year to qualify for a loan. This not only ensures that there’s enough cash flow to help the business pay back the loan, but it also proves that the business is viable.
If a business is under excessive debt, potential creditors may look away. This is because the main concern of any lender is the business’s repayment capability. If a lender observes that the business is piled under heavy debt, it could indicate trouble.
Before granting a business loan, creditors generally consider the business’s past performance track record and market presence. As a new business, it isn’t possible to increase your business history overnight. In such cases, it’s better to opt for alternative funding to improve your eligibility. For first-time businesses, it makes sense to consider alternative funding options such as crowd-funding, small business loans from the government, etc. It is important to establish good credibility before making a business loan application.
While not as vital as your credit score, the length of your personal and business credit history is additionally an element in your bank loan application. There are chances your application may get rejected if your personal credit history is lesser than 3 years.
Some lenders (particularly traditional lenders) will deem your industry as “too risky” to loan to. As an example, this might include specific agricultural or construction based businesses, however this will also depend on each individual lender. If this is the case, you’re certainly not to blame, but keep in mind that you may be able to seek finance through a government grant instead.
If you’re trying to apply for a secured business loan but lack the appropriate collateral to do so, then your lender will reject your application pretty quickly. If this is the case, then it may be worth considering an unsecured business loan instead, as this type of finance doesn’t require collateral.
A lender who approaches you with sugary words may not turn out to be so, once you are hooked. Before you commit to a lender, after calculating your home loan eligibility make sure that there is no likelihood of sudden decrease in approval amount from the lender. Credible lenders which include reputed banks maintain transparency at every stage.
Once the business knows about the potential reasons why its loan application might be rejected, here is some of how it can be better prepared to deal with it:
1) Improve Credit Score: The credit score of a business reflects directly on its debt-servicing capacity. Historical debt records allow lenders to calculate the business’s risk profile. Thus, it makes sense to maintain a disciplined payment cycle for all accounts receivables and credit card bills to boost the chances of loan approval.
2) Clear outstanding Debts: Lenders verify the loans which a business would have already availed. Any outstanding loans have to be paid off to improve the debt-to-income ratio and improve the borrowing capacity.
3) Adopt a smart Tax Strategy: Tax exemption allows a business to reduce the overall tax burden and increase total income. Therefore, businesses can consider hiring a professional for ensuring proper tax planning to reflect business profitability in terms of tax return income.
4) Make Sure You Have All Your Documents Correct: Even if your financials are impeccable, if you don’t provide the proper documentation to a lender, you’ll get denied for your loan. If you’ve been rejected for a loan, one of the first things you should do is review the documentation you filed with your application for a small business loan. If everything is in order, dig deeper into the financial picture that your documentation portrays.
5) Don’t Give Up: Just because you’ve been rejected for a small business loan doesn’t mean that your business isn’t viable or that you won’t go on to do great things. If you do get rejected for a business loan, take it as a learning experience. Carefully analyze the elements that led to your rejection and piece together a winning plan to overcome those obstacles on your next go-around.
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