Finance helps in the purchase of new equipment and/or inventory, marketing, renovation, etc. to expand your business. Beyond your own pockets and that of your friends, you would need to tap external sources for money. Business Loans, whether secured or unsecured, are a great way to grow your business. However, as a small business owner. you should be well-prepared to avoid rejection of your loan application.
6 Reasons Why A Small Business Loan Is Rejected
1. No Collateral
If you are a small enterprise, you are probably in the process of spreading your wings. Financial lenders are wary of giving you loans without collateral. Your markets may not expand as per the plan, or you may be unable to process the order. In any eventuality of your earnings falling short, lenders have nothing to fall back upon. Therefore, not having collateral or a low collateral valuation may get your loan application rejected.
Unsecured business loans can get you loans with minimum documentation from the non-banking financial institutions (NBFCs). Bajaj Finserv offers business loans up to Rs. 30 lakh without security. Their small business loan interest rates are nominal. The tenor can range from 12 to 96 months. Business vintage should be of minimum 3 years.
2. Inadequate Documents
Financial institutions require documents to gauge the financial stability of your business. They check for other parameters before deciding to lend you funds. Even for unsecured small business loans, basic documents are required. Failure to provide the necessary documents can keep you from getting the loan.
Bajaj Finserv approves small business loans within 24 hours. For small business loan eligibility, keep these documents handy:
- KYC Documents
- Business proof (certificate of practice)
- Bank account statement of the last month
- Financial statements on the business for a certain number of years such as Profit and Loss, balance sheet and cash flow statements
3. Credit Score
Lenders consider the company’s credit report (CCR). This report maps the credit history, company’s profile, registration, defaulting on loans and others. Loan defaults and poor credit history reduces the credit score. Low credit score can keep you away from loan approval.
4. Inadequate Cash Flow
Most lenders avoid lending to businesses which have a negative cash flow. You have a negative cash flow when expenses on payroll and inventory exceed the monthly income. Lenders study various ratios from your financial statements, to see if your company has enough liquidity to service the loans. These include Current Ratio and Debt Service Coverage Ratio (DSCR). Another important ratio is Quick ratio. Quick ratio of 1:1 is considered good.
Acid Ratio or (Quick Ratio) = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable)/Current Liabilities
5. Over Leveraged Business
Financial Institutes prefer a company with lower Debt to Equity ratio. Very high debt component means that the company is over leveraged. Debt/Equity Ratio = Total Liabilities/Total Equity. Your company would already have other’s debt to service, thus making lenders jittery about giving you any additional debt.
6. Business Plan
A business plan is paramount to win the hearts of the lending institutions. Major deterrents could be:
- Inexperienced management
- Greenfield projects like hotels with long gestation periods before operations begin
- Unclear business plans
- External factors like government rules, competition, taxation, and others
Unsecured Business loans obviate the need for collateral, minimize documentation and provide large coverage at nominal business loan interest rates. If your company has good credit score; sound business plan and liquidity, you can get your unsecured business loan approved from NBFCs. Get an idea of the EMI of Bajaj Finserv Business Loans and send an application for the same.