How to Get Financial Institutions to Say Yes to Your Business Loan Application?

 

Introduction

With the new entrepreneurial drive in the country, we can see the rise of many small and medium businesses. Today these enterprises are thriving and gainfully contributing to the economy. But still many business ideas could not see the light of the day because there was no one willing to fund their brainchild. However, you cannot blame the lenders for it as they have their own parameters by which they evaluate a business proposal and other factors to sanction a loan. Getting a small business loan might not always be easy and that is why as a loan applicant, you must be convincing enough to get the desired capital at good terms. Let us learn more about why most loan applications are rejected and how can the applicant get approval from the lender.

Let us first see why getting a small business loan is tricky:

• New Business:

Everyone has a grand business idea that is just waiting for capital to take off. However, as a lender, it is practically impossible to back all business ideas. The new businesses generally have no track record and lenders demand at least two years of experience in the field from the owner. Financial institutions are more likely to fund companies with a history of strong cash flows, as they do not want to lose money by lending it to a company in a nascent stage that might fold up in a few weeks.

• Poor Credit Score:

Though there are lenders that focus less on credit score, conventionally the three-digit figure is of great importance to get a loan. If you have a poor credit score – both personal and business - it means you either have delayed payments in the past or already have other debts to repay. In such a case, your loan will be rejected, as your creditworthiness is low.

• Inadequate or No Collateral:

Lenders want to lower their risk while lending money. Therefore, when an applicant offers to put a valuable asset on the stake as collateral, the element of risk reduces for the lenders and they become more willing to sanction the loan. If you have an inadequate or no collateral at all, your application is likely to be rejected.

• Part of Excluded Industry:

If you find your application is rejected despite having ticked all boxes, it might happen that your business enterprise is part of the excluded industry. Some business types including life insurance companies, medicine-based businesses, or certain types of health businesses, are considered quite volatile in nature and lenders avoid getting in any agreement with them.

How to convert a 'NO' to 'YES'?

1. Explore options and approach the right lender:

 Small business enterprises are seen as a way of generating employment and thus, the government tries to back such firms. So, there are state-sponsored schemes that help new businesses grow. The owner must research on such schemes. Also, no one lender is like the other. They all have different eligibility criteria – if some focus on collateral, others may look at the credit score. Therefore, the idea is to explore the market and approach the right lender who understands your financial constraints and capital requirements.  

1. Keep track of the lender’s requirements:

Once you have zeroed in on the lender, thoroughly understand their requirements and try to meet the minimum benchmark in every aspect while outperforming in a few of them. For instance, if the lender wants a high credit score, make sure you settle the pending credit card bills and rectify any errors in your credit report before approaching the lender.  

 

1. Develop a detailed business plan:

Broad numbers do not work while convincing the lenders. Since the latter will scrutinize the organization’s financial, operational, and managerial risks, the owner must assure them that the business will have enough profit and cash flow to settle the debt. Your business plan needs to demonstrate a solid model backed by sound management. The owner must explain in detail the anticipated costs of operation, the USP of the product, the target group, the marketing strategy, and how the revenues will be more than the expenses. One should also share future projections, list of milestones achieved, history of the promoters and customers, etc.

1. Provide financial statements and legal documents:

It is imperative that your finances look in good shape and represent the financial health of your business fairly. For this, the owner needs to provide information such as credit history, balance sheets, accounts receivable and accounts payable statements, and references from vendors indicating timely payments. To prove that the business is not involved in any legal hassle, attach corporate tax returns, registration certificate, and audit reports. A summary of personal assets and liabilities should also be furnished along with identity, age, and address proofs.  

Conclusion

Getting a business loan for your relatively new business is very challenging even as youngsters are being inspired to become entrepreneurs. However, one must not get disheartened by the rejection of loan applications. Instead, one must know that several applicants failed to do their proper homework before applying and so you should avoid those errors. As explained above, a little research and preparation can get you the capital funding that will take your business to newer heights.

Know more about SME & Commercial loans