7 Reasons Why Lenders Turn Down Business Loan Applications

Updated on: 04 Jan 2024 // 4 min read // Business Loans
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You need capital to start a business. Would this capital be enough to sustain your growth? You will keep needing funds to expand your business. As the company grows, you need money to fund working capital needs. The best way forward is to opt for business loans. banks approve business loans with or without collateral depending on various factors. However, everything always does not go according to plan. 

We explore 7 reasons why lenders turn down Business Loan applications and also look at possible solutions to rectify the problem.

1. Low personal credit score

As part of their ‘Due Diligence’ process, banks refer to credit bureaus to obtain the credit history of the company as well as its principal promoters. If you have a low personal credit score due to outstanding Credit Card payments or too much of debt, banks have a valid reason for rejecting the Business Loan proposal. The solution is straightforward. You should improve your credit score by clearing all your dues.

2. Victim of an identity fraud

In this age of computers and the internet, identity fraud is not a new issue. Hackers and fraudsters get ample opportunities to steal vital information about you. They can clone Credit Cards and take Personal Loans in your name. You might not even know about it until you apply for a Business Loan and find that the bank rejects your application. You can avert such a situation by requesting a copy of your credit history from the credit bureaus. You get one report free on an annual basis. Go through the report thoroughly and dispute any inaccuracies. Sort them out before you apply for a loan.

3. Incomplete paperwork and not asking for enough money

Banks rely on documents while approving your loan application. It is necessary to provide adequate materials to enable banks to process the request. The materials include your KYC requirements, documents evidencing establishment of business, financial statements and projections, collateral, and so on. Banks can ask for more records if they find them necessary.

Failure on your part to provide the same can result in rejection of the Business Loan. Similarly, your projections and financial data should be consistent. Inaccuracies in this area are also valid reasons for denial. You can solve this issue quickly. Provide the requisite documents to the bank. Be consistent with your demand. Apply for the correct loan amount.

4. Your industry may be under a high-risk category

Traditional lenders such as nationalized banks categorize industries as risky or safe depending on factors like market conditions, the bank’s track record with the particular sector, Governmental policies, and so on. If your industry comes under the ‘high-risk category,’ the banks can reject your Business Loan application. The only way out for you is to approach a lender that does not consider your industry as risky. The new generation banks can come to your rescue.

5. Lack of collateral

Lenders in India are comfortable while lending with collateral. They can opt to cover their Business Loans under the CGTMSE guarantee coverage. However, banks have their internal policies that can restrict their exposure to the CGTMSE guarantee. Under such circumstances, banks can ask you to provide collateral. If you are unable to offer the same, they can reject your loan application. The solution is to offer either collateral or try another bank that provides business loans without collateral. You can also try out the invoice factoring companies for temporary working capital requirements.

6. High debt utilization

Banks check your personal credit history before approving your Business Loans. A high credit utilization ratio (CUR) on your part is a valid reason for the rejection of your loan. You can ask for your credit history report and rectify matters. Keep track of your credit limits and its usage. Maintain a reasonable CUR to get a business loan approval.

7. Multiple Loan applications

Banks check your credit history every time you make a loan application. It could be for a Credit Card, a Personal Loan, a Home Loan, or a Business Loan. Multiple loan applications can result in numerous inquiries with credit bureaus. It can bring down your credit score within no time. Refrain from applying for various loans while looking for a business financing to expand your business.

We have seen 7 reasons why lenders turn down business loan applications. The solutions provided alongside should help you set things right.