5 Reasons Why Indian Businesses Face Rejection for SME Loan
Small businesses can face several challenges due to limited means. However, a business loan helps take care of most of these issues. You can take a loan at an attractive business loan interest rate and use the money to cover many heads, such as hiring, office supplies, operational costs, etc. However, while a business loan is a convenient form of credit, it can sometimes be rejected.
Here are the top reasons for its rejection and how to avoid them.
- No work history: A lender may reject your loan if you are a new company with no relevant experience or profit and loss history to back your loan. It can be hard for lenders to gauge your future performance and the ability to repay the loan without any records. Sometimes, a loan provider may support an incredible start-up idea if they see merit. But many a time, they may reject your loan. In this case, you can resort to a personal loan or use your savings to sustain your expenses and gradually build up your chance to apply for an SME loan eventually.
- Low credit score: Like individuals, companies also have a credit score known as the Company Credit Report (CCR). If the CCR is low, the chances of getting a business loan approved substantially drop. Ensure you pay all taxes and debts to maintain a good credit score.
- Unfavorable cash flow: A positive cash flow indicates profits and strengthens the loan provider’s faith in your business’s repayment capacity. A negative cash flow, on the other hand, can mean losses. If the lender is not convinced of your ability to settle the loan in time, they will reject your application.
- Not having collateral: Collateral acts as a security when you take an SME loan. This is leverage for the lender. If you fail to repay the loan, the lender has the legal right to seize the collateral and use it to recover the costs of the loan. Not having collateral or collateral much lower in value than the loan can result in your loan being rejected. It may help to look for a non-collateral loan.
- Wrong or incomplete documentation: To apply for an SME loan, you need to submit the loan application form, identity proofs, a copy of certified bank statements for the last six months, a copy of the trade license or any other business proof, a copy of the partnership deed, income tax returns for the previous two years, profit and loss statements, and the balance sheet for the last two years. Your loan will be rejected if any of these documents are missing or incomplete. So, ensure all the required documents are complete and ready to be furnished by the lender.
To sum it up
A business loan can help you gain the heights of success you desire. But to get one, you must ensure your business qualifies for the loan. Maintain a good credit score, submit all relevant paperwork, and keep a positive cash flow. Also, ensure to have collateral. If not, you can apply for a collateral-free business loan from a reputed lender.