8 Factors That Keep You from Getting a Business Loan
Finance has remained a big challenge for the industry, and business loans have helped many companies in getting the required funds. Many businesses need funding for purchasing equipment, hiring employees, renting a workplace, securing inventory, and managing expenses. The lack of capital can make a massive impact on businesses. It might lead the company to reduce employee strength and stop expansion.
As the business loan plays a crucial role in growing business, it is vital to understand the most common barriers faced by borrowers in securing a business loan in India. Once you go through these barriers, you can go ahead with a better plan to avail the best business loan. Knowing these can help you pre-plan several things that would reduce the chances of your application from getting rejected. Here is the list of the eight most common barriers faced by business loan applicants in India.
1. Adverse credit history:
Your credit history has a significant impact on acceptance and rejections on your business loans. Lenders use your credit reports to understand your credibility and ability to repay the loans. If you have been bad at paying back loans according to your credit reports, you might get rejected. So, make sure to repay your existing debts on time so that your credit score increases to a level that can support your loan application. Sometimes, a lot of good people are not able to get loans due to credit issues. Most lenders look at the credit score and disapprove of your loan if it is less than 720. If your credit score goes less than 700, you should focus on driving down any debt on your name before making a business loan application.
Another most common problem faced by borrowers is that they do not have all the documents that are required by the banks. Before applying for a business loan, the business owners should keep all the required documents handy. Many times inconsistent business practices and sloppy bookkeeping, like mixing business and personal bills, and not filing tax returns can lead to rejections. So, it is advisable to take some time to gather all necessary information and read over your business loan application before submitting.
3. Lacking a solid business plan:
A business needs to have a proper plan, and the company needs to stick to that plan. A lot of small and medium business companies lack formal planning. Applying for a business loan with a half-baked plan or no plan can face rejections. A standard business plan needs to have your company summary, products, markets and financials. You should be able to explain why you need a business loan to get it approved.
4. Multiple loan applications:
Opening too many loan applications at once can lead to a red flag. Lenders may assume that you are too desperate for funds, and it is unreliable why you need the loan. So, stick to making one application at a time.
In addition to qualifying for a business loan in India, business owners need to demonstrate why they are a better candidate for a business loan than others. You need to draw their faith and make them believe in you.
6. Lacking expert advice:
For any business to make the right financial decisions, it is crucial to seek advice from knowledgeable people. Accountants can provide a good share of help too. Moreover, you can connect to retired people having experience in your market. Use a business loan calculator to understand the right amount of funds you require.
7. Fail to explore options:
Sometimes, it might be tempting for you to sign up to the first lender. But it is essential to explore opportunities in the market to avail the best possible loan. You can look for alternatives to traditional lenders, like the online lending platforms, and peer- to-peer lending sites.
8. Limited cash flow:
Most lenders can’t afford to provide you with funds if you have insufficient cash flow. You can optimize the cash flow in your business if you take preventive measures quarterly. You can calculate your debt service coverage ratio by dividing net operating income to net annual debt to figure out how large loan payment can you afford. Lenders prefer a rate of 1.35, though 1.0 is also acceptable. Higher ratio demonstrates that you have got enough finances to repay on time. You may use a business loan calculator to help you out with the calculations.
Filing a business loan application is a short and easy process. But to avoid rejections, you need to be smart to know the problems that your loan application might face. So, to get a secured business loan in India, you need to go through the details mentioned in the article. You can use a business loan calculator to preplan your requirements; it will help you avoid issues from getting a business loan.