Reasons Why Your Business Loan Rejected

Wondering why your business loan was rejected? Learn the top reasons for loan rejection and how to improve your chances of approval. 

Understanding business loan rejection would be easy if we took up an analogy. Consider yourself to be an architect with a vision for building a skyscraper. You spend months meticulously going over every intricate detail. However, just as you’re about to break ground, the municipal corporation rejects your construction permit. Watching your elaborate plans go up in smoke can be both infuriating and demoralising. 

This is exactly how a business owner feels when his loan application gets rejected. However, understanding the reasons for loan rejection is the first step in turning that “no” into a “yes”.

In this article, we will explore the most common causes of business loan rejections, actionable solutions, and additional insights to help you secure funding successfully. Let us give your business the boost it deserves!

1. Poor Credit Rating

A bad credit rating is one of the main reasons for loan rejection in India. Lenders utilise credit scores to gauge your ability to repay loans. Lower scores mean higher risk, inhibiting lenders from okaying your application. They think that lending to you is risky!

You can improve your credit scores by doing the following: 

• Clear outstanding debts immediately. 
• Pay your bills on time and don’t apply for multiple loans at once.
• Monitor and review your credit report regularly to check for errors that could impact your credit score.

2. Insufficient Business History

Most lenders require businesses to operate steadily over a reasonable period of time. New and small businesses are considered high-risk due to a lack of established sustainability, especially those that are less than a year old.

Solution:

• Start with smaller loans when the business is new, such as microloans or crowdfunding, until your business matures.

• Focus on building stable revenues and maintaining proper financial records to enhance credibility.

A well-established business will mostly have stable revenues and a higher probability of getting larger loans approved quickly.

3. Incomplete or Incorrect Application

Loan applications with missing or inaccurate information are frequently rejected because lenders cannot effectively assess eligibility. Lenders might reject such applications if the documentation regarding the financial soundness of a business and its true identity is incomplete or inaccurate. 

How to Avoid:

• Create a checklist to ensure all required documents (financial statements, tax returns, and identity proofs) are accurate and complete.
• Double-check every detail before submission.

An online application for a business loan should be made after one has ensured all details are correct and all financial statements, tax returns, and other necessary documents are accurate. 

4. Insufficient Collateral

Often, lenders and financial institutions require collateral as security for business loans. Without suitable assets to pledge, your loan applications may be denied. Why? Lenders rely on collateral to recover their funds in case of default. 

Solution:

Opt for unsecured business loans, i.e., the ones that don’t require collateral. However, these may come with higher interest rates.

At My Mudra, we bring you business loans of up to ₹1 Cr without the need for collateral. What’s best? You get to benefit from low interest rates starting from 10% p.a. Access funds through a hassle-free process from reliable lenders.

5. Low Revenue or Profit Margins

Businesses with low revenue or thin profit margins are often deemed incapable of repaying loans reliably, thereby inhibiting lenders from approving your loans and rejecting your business loan applications.

Lenders look for businesses with stable and sound finances that can quickly repay the loan without any hassle. Focus on increasing your business revenue before reapplying. 

How can you improve your revenue, you ask? 

Just implement the following:

• Introduce new revenue streams or cut unnecessary expenses.
• Stabilise your finances and create a steady profit margin before reapplying for a loan.

6. High Debt-to-Income Ratio

Lenders focus on the amount of debt your business carries in relation to its income. A higher debt-to-income ratio raises concerns about your ability to repay loans, since it reflects that your business is under excessive debt, as opposed to your income.

Solution:

• Pay off existing debts strategically to lower the ratio.
• Avoid taking on additional liabilities until your financial position improves.

To reduce your scope of business loan rejection and make getting an online business loan easier, focus on lowering your current debt.

7. Weak Business Plan

Lenders want to know if you have an actual plan for using the loans to usher in growth. They need clear insights into how borrowed funds will be used effectively in the business. An unclear or incomplete plan often proves to be an elemental reason leading to the business loan rejection.

Tips:

• Develop a comprehensive business plan outlining goals, fund utilisation strategies, and repayment methods.
• Highlight how the loan will contribute to growth and profitability.

An effective plan can be a bonus in quickly achieving approval for an online business loan.

8. Industry Risk

Sectors such as hospitality and construction are generally seen as high risk due to their unstable nature.. If you are a business owner operating in any such industry that is deemed to be high risk, securing an online business loan might be more challenging for you.

Solution:

• Search for lenders that specialise in high-risk industries.
• Opt for loans of relatively smaller amounts for easy approval.
• Explore alternative financing options like start-up loans or industry-specific lenders for instant online business loan approval.

9. Applying for the Wrong Type of Loan

You should also be mindful of what type of loan you are applying for. It needs to be in line with your business goals. Applying for a loan that does not match your business needs can result in business loan rejection. 

Fix:

Having a clear purpose for the loan and accordingly choosing the appropriate type of loan for your business can reduce the chances of your business loan being denied (e.g., short-term loans for immediate requirements or long-term loans for expansion and growth).

10. Multiple Loan Applications

Submitting several loan applications at the same time can have a negative impact on your credit score. This may occur because you trigger a hard credit inquiry each time you submit an application. It indicates financial instability to the lenders. Multiple loan applications make you a high-risk borrower.

Recommendations:

• Before you send out an application, use tools that assess your eligibility without impacting your credit score. You can use My Mudra’s Loan EMI & Eligibility Calculator. 
• Next, you must thoroughly check out the specific eligibility criteria laid down by potential lenders so that you find the one you align with.

Also Read: How to Improve CIBIL Score Instantly

Conclusion

Facing rejection when applying for a business loan can be discouraging. However,  understanding the “whys” behind your business loan rejection can help refine your approach. Tackling the problems we highlighted earlier will make it easier for you to get a quick business loan without the fear of business loan rejection.

Remember that every lender has unique requirements, so do not give up after a business loan rejection. Actively addressing critical issues can help you secure the best online business loan to support your business!