Small Business Loan in India
Small Business Loan in India

8 Reasons Why You Face Rejection For Small Business Loans

Funding is an important factor contributing to the growth and success of a small business. This is the reason why business loan is crucial for scaling a small business.

Government of India has identified the importance of MSMEs in India’s growth story. RBI has taken several measures to ease access to credit for MSMEs like including them in priority sector and issuing guidelines. Also, the loan application process has been simplified. However, there are some red flags which can force the lender to reject a loan application of small businesses.

Hence, it is important to understand some of the reasons due to which loan applications of small businesses get rejected as it helps to prepare well in advance and increase the chances of loan sanction.
Some of the common reasons why the loan application of a small business faces rejection are:

  1. Poor Credit Score
    Poor or inadequate credit history drastically reduces the chances to get a loan as repayment capability and interest payment capacity of borrower are questioned. Low credit score also signifies that previous loans were not serviced timely and irresponsible credit behaviour. Credit score also affects the rate of interest at which loan is provided.

  2. Lack of Collateral
    Most of the banks and NBFCs ask for collateral in the form of land, building, fixed deposits, etc. against which loan can be sanctioned for a long term. MSMEs generally get loans at low LTV (Loan to value) i.e. loan as percentage of valuation of collateral.

  3. High Debt levels
    If the business is already highly levered, it is unlikely that lenders will sanction a new loan as default risk shoots up and signals financial instability.

  4. Industry Risk
    Business operating in cyclical industry are more likely to face loan application rejection. Some examples of such industries are hospitality, construction, agriculture, oil, etc.

  5. Insufficient Cash Flows
    When the business struggles with its cashflows, the lenders become apprehensive of its capability to service debt obligations on time. Consistency in revenue inflows is crucial.

  6. Incomplete or Inaccurate Application
    Providing inaccurate information or missing important requirements in loan application to lender can lead to rejection. Some of the important documents are KYC, financial statements, details of stakeholders, etc.

  7. New or Unproven Business/ Lack of Business Plan
    Lenders prefer to offer loan to stable business with good track record of profitability. If the business is unconventional, there persists high business risk. Seasonality and ratio of expense to revenue are also important factors. Hence, it becomes pertinent to have a concrete business plan and strong cash flow projections to eliminate lender’s concerns in sanctioning a loan. Alternatively, the business can wait for some time so that operations stabilize and then apply for a business loan.

  8. Economic Environment
    During economic downturns/ recessions, there remains high uncertainty due to which lending criteria is tightened and small business do not fare well. Hence, it becomes difficult to secure a loan for small business.

Understanding these intricacies will help your small businesses to success. A robust plan to improve your eligibility will help you to borrower at lower rates and greatly influence the time required for approvals.

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About Red Fort Capital

Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.

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