Reasons why Indian businesses face rejection for small business loans

The severe market competition in India has made it hard for small businesses to thrive. If you are running a small business, you will require additional funds. You can get it in the form of a business loan. You can opt for a small business loan online by visiting a lender’s website and entering relevant details. 

However, lenders often reject loan applications for not meeting certain criteria. Therefore, make sure that you know the reasons that can lead to loan rejection for small businesses. 

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Reasons behind Indian businesses facing rejection for small business loans

Following are the reasons that make small-scale businesses in India face rejection when opting for a small business loan. 

  • Low credit score

The company’s credit history is a vital factor in the loan approval process. After submitting the application, every lender will verify your credit status and the business organisation you are associated with. The organisation’s credit score symbolises how efficiently the company is running and how it has met its debt in the past.

Many of the small businesses of this nation suffer due to a lack of proper credit history. This is why they can face rejection while opting for a small business loan.  

  • Improper business plan

Making a business plan is a primary thing that every small business owner must remember before applying for a small business loan online. This is because, before approving the loan, the lender thoroughly judges your business plan and verifies the viability of the business.

When lenders see anything improper in a business plan, they reject your loan. Hence, it is essential to make a full-proof and flawless strategy by expert professionals. 

  • Lack of collateral

There are broadly two ways available to acquire funding for a small business. They are secured and unsecured. All you need to do is to focus on the requirement and guidelines of the lender or lending institution. In case if the loan amount is greater and you need the loan for a longer tenure, you can submit an asset as collateral with the financial institution.

The lack of collateral or insufficient value of the collateral is one of the reasons that can cause rejection of small business loan.

  • Inadequate documentation

Another important reason behind the rejection of small-scale business loans is due to improper documentation and credentials. You need to offer details about your business with relevant documents. The papers comprise income of business and KYC documents that must be given to the lender within a specified time for verification. 

In India, many small-scale business owners do not complete the proper formalities of their business loan, which results in their loan rejection.

  • Lack of cash flow

Lenders will run a cash flow analysis to determine a borrower’s ability to repay the loan after covering every operating expense. Hence, insufficient or weak cash flow will adversely affect the confidence of moneylenders. To avoid loan application rejection, you must improve cash flow by reducing unnecessary expenses and creating emergency funding.

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  • External factors

Apart from factors related directly to the business, some external factors can also lead to the rejection of a small business loan application. These can include government regulations, market issues, etc. 

To help Indian entrepreneurs, the Indian Government organised the Startup India scheme to build a sturdy and comprehensive platform for entrepreneurship in India.

Eligibility criteria for business loans vary across lenders. To reduce chances of loan application rejection, you can compare various offerings from different lenders. This will help you select a business loan which will have less chance of rejection.

Small-scale business entrepreneurs can get an overall idea from the above pointers about the reasons small businesses face loan rejections. Hence, before applying for a small business loan online, you must consider these factors to meet all necessary terms and conditions.