loan to start a business

Problems that Borrowers Run into When Getting a Business Loan 

Running a business is not an easy endeavour. Even experienced entrepreneurs face difficulty while operating a business. One of the common problems that business owners face is getting a loan for their business.  

A Business Loan can solve several problems for a business. It can help with cash flow issues, it can help with expansion, it can help with repairs and maintenance, and so on. However, business owners need to undergo a loan application process and not every application gets accepted by lenders especially if you need a loan to start a business rather than having an established business.  

Common reasons why Business Loan applications are rejected by lenders.  

Borrowing From Multiple Sources  

Lenders tend to reject loan applications for those businesses that already have debt on their books from other sources. If you already have existing debt, then additional borrowing can become difficult. This is because the debt-to-income ratio of your business may go off kilter.  

The first priority of any lender is to ensure that they will recover their money along with interest. When a business has accumulated a lot of debt, the possibility of default increases. This is why lenders always ask borrowers to disclose their existing debt while making their loan applications.  

To avoid such a situation, it is best to approach lenders for loans only once the existing debt has been cleared or when the prevailing debt constitutes a small proportion of the total income of the business. 

Low Credit Score  

A credit score is accorded to every business that has a good credit history. As soon as you borrow from a formal organization, CIBIL will assign a credit score. A credit score is a number that denotes the creditworthiness of the borrower. The higher the score, the more likely it is that the borrower will be able to repay the loan on time.  

Usually, banks and lending institutions want borrowers that have a credit score higher than 750. However, a credit score above 750 is difficult to obtain. You will need to have a near-perfect credit history to obtain such a number.  A Poor credit score is one of the main reasons why most lenders reject loan applications. The good news is that there are several ways of increasing your credit score such as by servicing all your debt on time. Further, commercial loan interest rates are also lower when the credit score is higher.  

Also Read: Everything You Should Know about Business Loan in India

Not Enough Collateral  

In certain cases, lenders need collateral for their loans. However, not every business has sufficient assets which can be secured as collateral for lenders.  

For example, a lot of businesses these days are service-based businesses that do not require any inventory or machinery to function. Such businesses have a hard time arranging security to qualify for a Business Loan.  

The requirement for collateral is usually not a problem for large businesses since they have huge assets. However, for small and medium-sized businesses, the need for collateral can become a major hurdle.  

No Consistent Cash Flow  

This is one of the biggest issues faced by small businesses when applying for a loan. Lenders do not like lending to a business that does not have sufficient and consistent cash flow. Consistent cash flow means that there is a steady flow of money into the business. This money can then be used to make loan repayments.  

However, if a business has low or inconsistent cash flow, then lenders get concerned that the business will be unable to service its loan on time.  

A business that cannot demonstrate steady cash flow is usually denied a Business Loan by the lender unless it can provide sufficient collateral to guarantee the loan.  

Requirement of Personal Guarantees  

In many cases, lenders require that the business owner or promoter personally guarantee the Business Loan. In case a personal guarantee is not given, the loan may be rejected, or it may attract a higher commercial loan interest rate.  

A personal guarantee means that the owner will be personally liable to repay the loan in case the company is unable to make the payments. When there is no personal guarantee, only the company is liable to repay the loan sparing the business owner.  

A lot of business owners do not want to personally commit to repaying loans taken by their company. This is largely because the borrowed funds are substantial and making such a commitment could prove to be damaging to their own finances.    

Also Read: 7 Best Ways to Get Funds for Your Business

Short Operating History  

Lenders want their borrowers to have a proven history of performance. Lenders use the operating history of a company to judge whether it will be in a position to repay its loan commitments in the future.  

However, the issue is that lots of new companies that need loans do not have a sufficient operating history. This can work against them when it comes to getting a loan approved.  

A good option for entrepreneurs that need a loan to start a business is to raise money from NBFCs which have less strict requirements compared to traditional banks.   

Weak Sectoral Performance  

Lenders review the sector in which their loan applicants work. They consider the present operating environment as well as the future outlook of the sector. For example, if you run a DVD rental business in the age of Netflix, then you will have a hard time securing a loan because the sector is dying.  

Banks have highly stringent norms when offering loans. If a bank feels that the sector in which a company operates is dwindling, then it will avoid sanctioning a loan to the entity. This is because a weak sector can dim the prospects of a company and make it less likely that the bank will be able to recover its money with interest.  

Wrapping Up

Obtaining a Business Loan is not easy. In such circumstances, you can consider approaching an NBFC which has fewer requirements compared to a traditional bank. NBFCs also process loans much faster than banks and you can receive the money in your company’s bank account within a few days of submitting the loan application. Commercial loan interest rates charged by NBFCs are also highly competitive. If you need a loan to start a business, then approaching an NBFC may be the best option for you.

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