Top Reasons for Business Loan Rejection in India

Updated on: 28 Dec 2023 // 4 min read // Business Loans
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A Business Loan can often prove to be the last resort, especially when the enterprise is facing a financial strain, or the business is awaiting an expansion. In some cases, a Business Loan can also prove to be instrumental in helping the venture make the most of the available opportunities.

A vast majority of business owners shy away from taking a bank loan due to the fear of rejection. A great way to deal with this distress is to know the leading reasons for business loan rejection beforehand.

Let’s take a quick look at the same of the most prominent mistakes made by Business Loan applicants in India.

1. Low Credit Score

When you apply for a premium bank loan such as SBI Business Loan, the lending institution first checks your repayment history to evaluate your financial health and expense management.  A poor credit score reflects poorly on your borrowing behaviour, and may therefore lead to the rejection of your loan application.

Hence, it is strongly advised that going in, you must first check the Credit Score of your business, as well as that of yourself, and apply only when both of these scores are favourable.

2. Insufficient Cash Flow

Yet another aspect that lenders analyse before approving your loan application is the cash flow of your business. Since a loan will bring upon the responsibility of paying monthly instalments on the business, the lender would assess your ability for repayment.  If your cash flow is exceptionally low, it can become a reason for the rejection of your application.

You can avoid this by maintaining a reasonable cash flow, which helps build the confidence of the lenders in your enterprise. To this end, simply cut down on non-essential expenses, ensure proper invoicing, and have a contingency fund set up for emergencies.

3. Excessive Debt

Lenders are always wary of offering loans to businesses that are in extreme debt since it puts a question on their repayment capacity.

To ensure that this doesn’t become a cause for rejection of your Business Loan, you must maintain a low credit balance, and pay off your existing debts before making a fresh application.

4. New Enterprise

When assessing your Business Loan application, most lenders consider your repayment history and take a look at your P&L Statements and ITRs from the past years. If you are a fairly new business, you may not have the requisite experience or records to prove your sound financial standing, which may prove to be a hindrance for approval.

In this case, you can contact other channels such as small business loans through various government schemes, or crowdfunding.

5. Frail Business Plan

Since a Business Loan often amounts to Lakhs and even Crores of rupees, banks are keen on knowing, how you plan to repay the same. You can prove your ability to repay this loan by showcasing your ongoing and upcoming business projects/ plans.  If your business plan seems inaccurate or has redundancies, you may lose the confidence of the lenders, and consequently, your application may be rejected.

Hence, it is crucial to have a substantial Business Plan in place before you approach a lender for this big-ticket loan.

6. Lack of Collateral

Considering that Business Loans encompass large sums of money, lenders usually require collateral, which can match the loan amount in value. In case your business doesn’t have sufficient assets that could be pledged as collateral, your loan application might be turned down.

To avoid this from happening, you must let the loan officers know if you have any personal assets that you would like to pledge instead.

7. Unclear Purpose for Procuring Loan

When you approach a lending institution for a Business Loan, they would need to know the precise reason for which you require the funds. Whether it is for the purchase of new assets or machinery, expansion, research, or development purposes, or for impending renovation or launch of a new product; you must be able to present the purpose of the loan very clearly. If not, the lenders may shy away from processing your application.

8. High-Risk Proposition

In case the market pertaining to your field of business is facing a slowdown, or doesn’t show much promise, your Business Loan application will most likely be turned down. The same holds true when any significant political decisions are being made around your business vertical. 

To ensure this doesn’t happen, make sure you are updated with the latest trends in the market. You ought to have a good credit score, pay off any outstanding debt, have a tax strategy in place that reduces your financial obligations, and formulate a fool-proof business plan which shows your growth potential. With these aspects being taken care of, it will be rather convenient for you to apply for a Business Loan and get the much-desired approval on the required amount.