Top 10 Reasons Indian Businesses Face Rejection for Small Business Loans

Running a small business in India is very tough. The increasing competition, low-profit margins, and innovative business models are making it tough for small businesses to stay afloat. There could be a scenario where your small business may need additional funds. Thisis known as a small business loan that is required to meet your business goals.

It is estimated that over 63 million micro, small and medium enterprises (MSMEs) were operational in India in FY21. The Indian MSMEs contribute close to 29% to Indian GDP and 40% to exports from India. Since these companies are making a huge contribution to the economic landscape of the country, several lenders have started to offer small business loans to meet their fund requirements.

Several business loans can be taken by a small business today. Depending on the end objective, you can apply for a small business loan with a lender as per your requirements. The application process for a business loan has been simplified to a large extent.

There are several lenders like Poonawalla Fincorp which offer you an online process for a business loan application. You do not need to visit any branch or office and submit multiple copies of your documents for getting a loan. With Poonawalla Fincorp, you can simply apply online for a loan for your small business and upload digital copies of your documents.

Even with these simplified processes, you need to keep in mind a few factors that can help you get approval for your business loan. It has been seen that since small business owners are aware of these factors, they may get their loan applications rejected from the lenders.

You need to understand that these factors play an integral part in getting approval for your small business loan application.

Here Are The Top 10 Reasons Why Indian Businesses Face Rejection For Small Business Loans

1. Low credit score
The credit history of the company and its founders/directors is an important part of the loan approval process. After the application is submitted, every lender will enquire about the credit profile of the company and its founders or directors. The credit score and profile of the company are an indication of how the company and its founders have handled debt in the past.

A credit score is a three-digit number that ranges from 300 to 900. A score above 700 is considered to be a good score while borrowers with a score below that may find it difficult to get a business loan approved.

Credit score also has an impact on the rate of interest that you are supposed to pay on the loan. A higher credit score may get you a small business loan at a lower rate of interest and vice versa.

In case you have a low credit score, you can take steps to improve your credit score before filing for a business loan application. You should maintain good credit behavior by paying due instalments on time and running old accounts to build a strong credit history.

2. Unrealistic business plan
One of the most important components in your business loan application is the business plan that is being submitted for which the loan is required. The lender assesses the business plan and checks the feasibility of the business projections.

In case the lender feels that the business plan submitted is far from reality and would be a risky investment, you may receive a rejection for your loan. It is important to project a realistic business plan to the lender to give confidence about your projections. Components like expected profit margins, target customers, and revenue growth map should be a part of the business plan.

The idea is to give confidence to the lender about your understanding of the business so that they are confident that you will be able to repay the loan. You should give a comprehensive view of your business to the lender so that the business loan application can be approved.

3. Inadequate documentation
One of the most common reasons why small business loan application is rejected is because of inadequate documentation. You are expected to provide information about the business along with documents related to the income of the business and KYC documents to the lender to assess the loan application. It is often seen that borrowers do not submit complete information to the lender and end up getting their business loan application rejected.

You should check the requirements properly before submitting your business loan application. Some lenders also expect you to share contracts, licences, etc. as well along with the business loan application. Once you are clear about what is required, get all the paperwork in order and then apply.

Ideally, you should check the required documents from the lender and get them in order before applying for a business loan. This would save a lot of back and forth between you and the lender.

4. Lack of collateral
A small business loan can be taken by both secured and unsecured routes. Depending on your requirement and the policies of the lender, you can apply accordingly. In case the loan amount is higher and you need the loan for a longer tenure, you may need to submit collateral with the bank for a business loan.

Lack of collateral or inadequate value of the collateral may be one of the reasons why your business loan application may be rejected.

It is important to note that the lender is expected to finance upto a certain value of the property. For instance, some lenders may finance up to 60-70% value of the property that is being submitted as collateral.

If your loan requirement is more than the value of collateral, the loan application may get rejected by the lender.

In case you face such a situation, you can always take an unsecured business loan to meet your goals with ease. You can get an unsecured business loan with Poonawalla Fincorp in case you are facing trouble in getting collateral in place for a business loan.

5. Early-stage in business
Lenders prefer businesses with some years of experience. In case your business is in its early stage, you may find it difficult to take a business loan. These policies are dependent on the lender.

There are some lenders which entertain relatively new businesses with their finance requirements. If you are a new business and do not have a long history of cash flows, you need to find the right lender who is willing to extend a loan to you.

Without this homework, your business loan application may get rejected because of the policies of the lender. Even if you have a sound business and solid finances, the lender may require a business to be certain years old before they could extend a loan.

Ideally, you should spend a few years in business before applying for a business loan. This period would help you build a sustained cash flow along with a credit profile that may help in getting approval for a business loan.

6. Risky industry
One of the factors that may cause rejection of your business loan application is the nature of the industry that you are in. For instance, there are industries like hospitality, aviation, etc. that faced a setback during the COVID-19 crisis and took more than the usual time to get back on their feet.

A lender may have sector-specific policies which may cause rejection of your business loan application. In case you are facing a challenge in securing funds because of the industry that you are in, you can look at sector-specific lenders that are open to giving loans to companies in your industry.

7. External factors
Apart from the nature of the industry, there could be other external factors that may cause the rejection of a business loan application. For instance, there could be a change in the tax regulations of an industry which can make the lenders wary of the sector for a while. These could be tax regulations, government policies, or global factors that may contribute to this challenge.

You need to be aware of external factors that are impacting your industry and submit your business loan application accordingly. You should avoid filing an application for a small business loan in critical times like a recession, war, or any other geopolitical challenge in the economy.

8. Criminal history
In case any of the founders, directors or key personnel in the business has a criminal history, it could be one of the reasons why your business loan application may get rejected. Lenders prefer businesses and founders that have a clean history and have not indulged in any illegal activities.

In case there is a criminal history, the least that you can do is to disclose it to the lenders and explain the scenario in which the case was filed. In case of serious offences, the lenders will outright reject the business loan application.

You can remove the founders or directors from the company before filing a business loan application. A good practice would be to still disclose it to the lender so that there is increased transparency in the transaction.

9. Not asking for adequate capital
One of the least known reasons for the rejection of a small business loan is not asking for enough capital as a loan. This may sound counterintuitive, but you need to realize that it is a business for the lender and you need to make a sound business case for the lender as well.

There are costs involved in servicing a loan account and in case there is not much profit to be made, a lender may reject a business loan application.

You need to have a proper review of your business activities and expected fund requirements so that you can apply for adequate funds from the lender. It is often said that the larger the loan amount, the larger the chances to get it approved from the lender.

If the lender feels that there is a lot of work in the transaction and not much money to be made, it can reject your business loan application.

10. Weak cash flows
One of the primary ways why business loan applications are rejected is because of weak cash flows. You need to put your best foot forward and give confidence to the lender that you would be able to repay the loan with ease. One of the ways to do that is by projecting strong cash flows.

If the lender feels that your expenses are more than your income and you are facing challenges in managing day-to-day business operations, your business loan application may get rejected. Other scenarios like a seasonal slump in business operations, poor revenue, and cash flow gaps may also impact your business loan application.

You need to ensure that your cash flow statement is in order when you apply for a business loan. You can use accounting tools that will give you a clear picture of business cash flows. Poor cash flows are a critical factor in the failure of any business. To ensure that the lender is financing the right business, you need to manage your cash flows properly.

These are the top 10 factors why Indian businesses face rejection for small business loans. You need to keep these in mind as you apply for a small business loan. You can expand your existing business, diversify your business or take it online with a business loan. Depending on your end objective, you can take a business loan for an amount and tenure that is suitable for your objective.

You can apply for a business loan with Poonawalla Fincorp if you want a loan at an attractive interest rate with a nominal one-time processing fee and zero hidden charges. With a Poonawalla Fincorp business loan, you can get a high-value sanction with a flexible repayment schedule, quick approvals, and the convenience of end-to-end doorstep service.

Eligibility Criteria for a Small Business Loan

Applicants need to meet the following eligibility criteria to avail of a Small Business Loan:

• Age: The applicant must be at least 24 years at the time of loan application and should not be older than 65 years at the time of loan maturity.
• Business Vintage: The applicant must have a vintage of a minimum of two years.
• Annual Turnover: The business must have a minimum annual turnover of Rs.6 Lakh.

Documents Required for a Small Business Loan

The following documents are required to opt for a Small Business Loan:

KYC documents:

• Company PAN Card, Proprietor/ Director/Partner Aadhaar Card, Passport, PAN Card.
• Proprietor/ Director/Partner Aadhaar Card, Passport, PAN Card/ Utility Bills/Rent Agreement.
• Personal Documents: All Partner/ Director/Individual – PAN Card and officially valid documents & proof of address (if not as per officially valid documents)
• Business Documents: Business registration & address proof (If not as per business registration proof)

Business Address Proof: Utility Bills/ Rent Agreement

Financial Documents: Bank statement for the last 6 months.                                                                                                          

FAQs

• What are the most common reasons given by banks for rejecting Small Business Loan applications?

The most common reasons banks give for rejecting a Small Business Loan application is a low credit score or inadequate credit history. Additionally, insufficient collateral or a high level of existing debt may also contribute to loan application rejections.

• Why unsecured Business Loans are gaining popularity among small businesses?

Unsecured Business Loans are gaining popularity among small businesses due to their flexibility and accessibility, as they don't require collateral or personal assets to secure the loan. Additionally, the simplified application process and quicker approval times make them an attractive option for businesses in need of immediate funding.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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