While applying for a business loan, the eligibility largely depends on a range of different parameters. Financial institutions assess the loan applicant’s records before proceeding with sanctioning a loan request.
Many entrepreneurs often tend to commit the mistake of overlooking vital factors involved in obtaining a loan. Everything from a positive credit profile and having essential paperwork in place plays a key role when entrepreneurs apply for small business loans.
Not many might be aware but according to the federal reserve only about 40% of entrepreneurs who applied for business loans ended up receiving the amount they had requested.
Those figures certainly pose the big question pertaining to the status of the rest 60%. That bucket solely represents the bunch of entrepreneurs who end up making rookie mistakes while applying for a loan.
A business loan getting rejected can be extremely disappointing. Hence, new entrepreneurs are advised on paying more attention to the loan process. Not only will there be any room left for your vision to derail but the chances to quickly wrap the loan process also turns out to be a high possibility.
Below are a few common reasons linked to business loan rejection:
- Pending paperwork
- Pocket-sized loan amount requested
- Lack of strong cash flow
- Your debt records are too high
- Risky niche
1. Pending paperwork
Paperwork is the bridge that serves as a connecting point between you and your financial institution. A business loan is a financial transaction sanctioned to start a new business or meet the growing needs of an existing one.
With insufficient evidence to prove your business loan eligibility, it will only become more challenging for the institution to sanction it. Here are few records deemed crucial for a smooth business loan sanctioning process. Have it beforehand and your loan will pass smoothly.
| Sr No. | Important Paper works |
| 1 | Personal tax returns records to prove your credibility. |
| 2 | Business bank account statements. |
| 3 | Cash flow statement. |
| 4 | Personal and business credit reports. |
| 5 | Legal documents such as contracts, leases, licenses. |
| 6 | Permits and corporate documents if any. |
2. Pocket-sized loan amount requested
The modus operandi with financial institutions always inclines towards sanctioning big figure loan amounts. While logically it seems like sanctioning small business amounts puts the lender in a position of less risk. In reality, it is the opposite.
The cost of servicing loans with smaller amounts doesn’t pay off in favor of the institution sanctioning the loan. That’s the primary reason behind why financial institutions and banks have more inclination towards lending a huge figure as opposed to loans at low cost which proves to be disadvantageous to the institution.
3. Lack of strong cash flow
Never take your eyes off the cash flow. That’s the bloodline of your business. That’s an old saying about cash flow that still stands the test of time.
Lenders pay extra attention to assess your cash flow to determine your business loan eligibility. The motto behind scrutinizing your cash flow statement is to ascertain whether the applicant can repay the loan despite juggling business expenses.
Having a poor cash flow record can serve a huge obstacle for entrepreneurs and small business owners.
4. Your debt records are too high
A history of debt records represents holes in your game. Debt signals a poor credit score and it pushes an applicant to be valued less credible. High debt records put a stain on your status when it comes to financial institutions using a business loan calculator to sanction loans.
When sanctioning a figure for credit, lenders ideally expect applicants to use no more than 30%.
Lack of using credit responsibly can also count against you. What you need is a perfect balance without deviating to either of the extremes.
5. Risky Niche
Many factors play a silent role in shaping up a niche market. These aspects are carefully considered by financial institutions when lending loans. For instance, the restaurant and hotel industry, on an account of intense competition, has a high failure rate compared to other niche markets.
Similarly, starting a business in the gambling niche can also serve as an obstacle when it comes to obtaining loans. Hence, considering the right niche and projecting your vision towards assuring financial institutions play a key role in obtaining loans.
Apart from these five major factors, few aspects such as not having enough collaterals and poor business performance can also negatively impact your business loan eligibility.
Loan rejection can be fixed.
Here are two important things you can do to flip the situation to your favor:
- Get in touch with your lender:To uncover the reason why your loan was denied can help you correct where things went wrong. At times, something as simple as a few unintentional errors in your paperwork can lead to disaster. Contact your bank and know the reason.
- Build your personal and business credit:Take a step back and make an effort to fulfill this requirement. Maintain healthy relationships with vendors, stay on top of your payments, and build a positive credit profile.
Apart from these measures, if your situation is intense, you can opt to run a crowdfunding campaign or raise money from friends and family. These measures might work in your favor in the short term but not in the long run.
Building a positive credit profile is the best thing entrepreneurs and small businesses can do to seek loans. Once your loan history is solid, acquiring loans will then become a smooth process.
Also, it is crucial for entrepreneurs looking forward to applying for business loans to understand every aspect of business loan eligibility. Not just a few clauses, but having the utmost clarity of every little detail about the process and things like business loan interest rate will work in our favor.
Getting into these waters with absolute clarity of all the clauses involved is the equivalent of you being a professional swimmer.
