6 Impediments in getting a Small Business Loan

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As a small business owner, it is necessary for you to have a steady cash flow and easy access to credit during the growth stage of the business. It is a critical stage for every company as it has already established itself and is now pursuing a growth strategy. If during this stage, you do not have required cash in your hand, you will struggle to realize your growth objectives and might lose out the competitive advantage to your competitors. Whereas, if you are able to obtain the necessary capital for your business growth, you can take your venture to greater heights and wrest the initiative from your competitors.

In most case, small business owners depend on borrowed funds to meet their cash requirements. These small business loans can be obtained from banks as well as non-banking financial competitors. In earlier times, it was relatively easy for you to get a loan from financial institutions, but with the changing times, the lenders have now strict eligibility criteria which you must meet in order to qualify for a loan. The lenders are not willing to offer any relaxation in the eligibility criteria, and it is necessary for you to meet all their requirements to be eligible for a loan.

Why Loan Applications for small business loans are rejected

In order to make sure that your requirements for a business loan are not rejected by the lenders, you need to be aware of the following six factors that can keep you from getting a small business loan: –

  • Credit Score is below the acceptable threshold: – In the present times, as the banking sector is under a lot of stress due to rising NPA’s, the importance of a good credit score cannot be ignored. A Good credit score assures the lenders that you are a good borrower and repay your loans at times and also do not have too many outstanding loans. Every lender has a minimum threshold for a credit score, and if your score is below that specified limit, then the chances of your application being approved are very less.

So, before applying for a loan, you should pull out your own credit score and check if it meets the eligibility criteria of the lender, If it falls below the specified threshold, then you should seek professional help to repair your credit score and wait till your score meets the benchmark specified by the lender.

  • Inadequate Cash Flow – One of the main objectives of a lender checking your cash flow and calculating your liquidity ratios is to find out if you will be able to repay your EMI’s on time and if you have enough cash to meet your monthly liabilities as well. Without good cash flow, lenders will not have any confidence in your repaying capacity and are most likely to reject your application.

Before you apply for a loan, you should seek professional help to calculate your cash flow and identify the areas where you need to work. Some of the things that you could do to improve your cash flow are to invoice immediately, press for recovery of dues, reduce expenses and create an emergency fund. If you are not satisfied with your cash flow, then you should stop thinking of applying now and work to improve your cash flow cycle.

  • Ambiguous Business Plan: – It is a given that if you are applying for a loan, then you must have a well-defined business plan regarding where you would want to invest the money. If your business plan is not comprehensive and does not cover the various essential aspects, then the loan application is likely to be rejected. No lenders would lend their money to someone who is not sure how to use the money and as such might even struggle to pay back the amount.

In order to avoid such situations, you should take help from an expert and prepare a well-defined business plan covering all the aspects of your growth strategy, present as well as future. You should also prepare financial data to support your business plan. If your business plan covers all the important aspects and is a well-rounded proposal, then your application for a small business loan would most certainly be approved.

  • Inadequate Credit History or Collateral: – If you are a new business owner or have a start-up venture, then it is likely that you do not have any credit history. The absence of good credit history is a deterrent for the financial institutions as they do not have any information to assess your creditworthiness. In such situations, they might want to have security against the loan in the form of collateral. If you do not have any collateral or hesitate to put your own personal assets as collateral, your application might be rejected.

If you do not have a long credit history or collateral to support your application, then you must get a guarantor on board. A guarantor is a person with good credit standing in the market and assures the bank that you will repay the loan otherwise the bank can pursue the guarantor for recovery of the dues. IF you can get a financially sound person as your guarantor, the chances of your application being approved are significantly improved. Otherwise, you can avail services of the money lenders in Delhi without security.

  • Industry Variations: – The market conditions of your niche also have an impact on the prospects of your application for a small business loan. If the market conditions in your niche are unstable or there have been some recent orders by government agencies impacting the present situation of your business niche, the chances of your loan application to be approved are significantly reduced.

If you are aware of any such prevailing conditions, then you must wait for this temporary phase to wear out and when the situation is stable then proceed ahead with the loan application process.

  • High Debt Exposure: – If you are already running a number of business loans and a significant portion of your monthly revenues is going towards repayment of the EMI’s, your loan application may be rejected by the lender. Having too much debt exposure indicates that either you are an irresponsible borrower or do not have the means to repay your EMI liabilities. In such situations, your loan application might be rejected by the financial institution.

The ideal situation for you would be to wait for some time, clear out your outstanding loans or bring them down to a minimum and only then proceed ahead with the loan application.

Your requirements for a business loan must be fulfilled urgently and are essential for the continued growth of your business. So, you must prepare your loan application diligently and only after you are satisfied with all aspects of the loan application should you move ahead.

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