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13 Sep

7 Key Reasons Why Financial Institutions Decline Business Loan Requests

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Introduction

Over the years, there has been a significant rise in the number of financial institutions and modern-day lenders are providing loans customised according to the needs of the applicant. Even the approval rate of the loans has immensely improved. Yet despite all this, we hear cases of some business loan applications being rejected. Well, that is because there are a few basic eligibility criteria that the business owner must meet to get a loan sanctioned. Lenders evaluate the creditworthiness of the applicant to ensure that there are no defaults. So, let us discuss seven key reasons why financial institutions decline business loan requests. Business owners should take into account these reasons to avoid or reduce the chances of experiencing this undesirable scenario.

  1. New or negative income business:

Financial institutions prefer to work with established organisations with a credible and lengthy track record. This is their way of assessing if the business has taken the right operational measures and has the ability to generate a decent revenue. They will, generally, not prefer working with organisations that are new or the ones that have been in the industry for a while but have failed to stabilise their operations. Without the assurance of revenue generation, lenders will reject the application for loan. Therefore, companies with no solid operating history will most probably be denied a loan. 

  1. Poor Credit History:

Your credit score plays a very important role in determining your credibility as a loan applicant. It is a great tool to assess your loan as well as loan repayment history that helps financial institutions analyse your loan application. If you have fewer loans to your name and a good repayment history, your credit score will indicate that you are responsible and most likely, will not end up defaulting.

  1. Insufficient Cash Flow:

The first thing that financial institutions look for before granting loans is the financial capability of businesses. If the financial flow remains unimpressive, these institutions will deem your organisation incapable of paying back the loan and will reject the applications immediately. Briefly, companies that cannot prove an optimum cash flow are usually not preferred for loans and financial assistance.

  1. Pre-existing Debt:

Having pre-existing debts might compromise your loan application. Simply put, the creditors will consider this factor as your inability to pay off the loan and will be cautious in considering you as a potential candidate. Paying away previous debts before and maintaining a low credit balance will increase your chances in getting your loan application approved. 

  1. Lack of Collateral:

Loans, exceeding a certain value, require a collateral. This collateral acts as a backup for financial institutions to secure themselves in case the loan applicant is unable to pay back. In such cases, if your organisation does not have any collateral to rely on, financial institutions are most likely to reject your application for the loan. 

  1. Weak Business Plan:

While you are applying for a loan, it is important to present your business plan to your potential lenders. A weak business plan will create a weak image, which will deter the financial institution from considering you as a responsible candidate for the loan. A well-drafted business plan with clearly highlighted operations and vision, backed by in-depth market research, will be vital in getting a nod of approval from the lenders. 

  1. Unstable Industry and Economic Conditions:

While the financial institutions will look into your organisation and its functioning, it will simultaneously keep an eye on the relevant sector as well. If the market growth is insufficient and shows little to no promise for growth in the future, the institutions might reject your loan application. Your lender will be vary of the market’s status and if not satisfied with its economic growth, will decline your request for the loan. 

Conclusion

If you are an upcoming business owner who needs capital funding for the growth of your company, a small business loan is an ideal option. However, experts always suggest loan applicants to first, do their research about the terms and conditions of the lenders as misinformation leads to mistakes that can cost you the loan approval. A business owner who is well-aware of the above-mentioned reasons for loan rejection will make sure to have ticked most of the boxes, present an impressive profile before the lender, and get the loan sanctioned in a quick and hassle-free manner.

 

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Did You Know

Statement of Account (SOA)

Statement of Account or SOA or bank statement is a record of all financial transactions that take place on an individual's or company's account with a bank or other financial institution. In the case of loans, it is a statement which records EMI payments, Pre/Part-payment amounts, penalty charges, etc. Such statements recored both inflow and outflow of money from a given account.

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