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Reasons Indian Businesses Face Rejection for Small Business Loans

August 25, 2022 11:16 am | Updated 11:16 am IST

In India, the high level of market competition has caused difficulty for small businesses to succeed. Undoubtedly, when you run any small business, you will need adequate funds to run business operations smoothly. You can get the required credit through a business loan. For this, you just need to apply for a business loan by visiting a lender’s website and filling up the loan application form with your details.

However, under a few circumstances, lenders may reject your loan approval. You need to be aware of those to avoid chances of getting rejection on your credit requests.

Why do Businesses Face Rejection on their Requests for Small Business Loans

Following are some reasons that make Indian businesses suffer from the rejection of their loan requests:

●        Poor credit score

The credit score plays a vital role during the loan approval process since it represents the creditworthiness of borrowers. After you apply for a business loan, your lender will check your credit status.

The credit score evaluates the business owners’ financial history. Their credit scores reduces if they fail to repay their debt obligations on time. Many small business entities face the problem of poor credit scores, which in turn makes them face rejection on their requests for small business loans.

●        Improper documentation

The second reason that makes small-scale business entities suffer from the rejection of business loans is improper paperwork. While you apply for a business loan, you must submit business documents to the lender properly. These documents include KYC documents, bank statements, tax returns, contracts, etc. Due to negligence or inadequate knowledge, they fail to properly complete these formalities, resulting in the rejection of their loan applications.

●        Lack of collateral

Another reason that makes business entities suffer from the rejection of loans is due to lack of collateral. Although in a business loan, the involvement of collateral is not mandatory. However, some lenders ask for collateral as a guarantee. In case of non-repayment of the loan, they can raise their lent capital by auctioning the asset.

●        Inappropriate business plan

A sound business plan is one of the foremost things you must ensure while applying for a business loan. This is because your lender will thoroughly evaluate your business plan to get an assurance that you will not make losses. If the lenders find anything faulty in your business plan, they will at once reject your loan application. Hence, it is essential to involve expert professionals to make a flawless business strategy.

●        Inefficiency in cash flow

Lenders also analyse the free cash flow of your organisation to verify whether you have the potential to repay the credit amount. Insufficient liquidity adversely influences the confidence of lenders. To avoid rejection, you must improve cash flow by reducing unnecessary expenses.

Further, if your lender figures out that your organisation’s expenses are more than what it earns or there is any seasonal slump, they may reject your loan request.

●        Unable to meet MSME eligibility criteria

The eligibility criteria vary from one lender to another. You have to fulfil all the eligibility requirements of your lender. These MSME eligibility criteria comprise age limit, minimum earnings, citizenship, and so on. If you fail to meet these conditions, your loan application can be rejected.

In this regard, you must also be aware of the common eligibility parameters for a small business loan.

Eligibility Criteria for a Small Business Loan

Following are the eligibility criteria for a small business loan:

  • The applicant should be an Indian citizen.
  • The borrower must be self-employed with a minimum of 3 years of experience in the business domain.
  • His/her age must be between 21 years and 65 years.
  • The balance sheet of the business must show profitability.

Besides the eligibility parameters, you also need to be aware of the documents required for the small business loan.

Documents Required for a Small Business Loan

Following are the documents required for this credit facility:

  • Identity proof (PAN card, Aadhaar card, passport, voter ID card, etc)
  • Address proof (passport, Aadhaar card, voter ID card, etc)
  • Bank statements for the last 6 months
  • Balance sheet showing profits and loss in the last 2 years
  • Income Tax Certificate of your firm
  • Business proof (comprises trade license, commencement certificate)
  • Sole-proprietorship deed

Note that the lending institutions may also ask for additional documents to validate your loan applications and verify your credentials.

In conclusion, by being conscious of the mistakes resulting in the rejection on business loan applications, you can avoid committing those while applying. It will help you obtain the credit quickly. Nevertheless, while you apply for a business loan, make sure to keep all the required papers beforehand. It will help you avoid last-minute hassles.

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