Small and Medium Enterprises (SMEs) have neither the luxury of a big bank account nor the backing of any global giant.
Their profits are seldom enough to expand operations to try and unsettle their competition. As such, they are mainly dependent on Business Loans from banks to give wings to their vision.
According to a survey, a majority of Business Loan applications of SME owners are turned down in India.
But blaming banks for such high Business Loan rejection rate isn’t right either, given that they have a plethora of government and organisational guidelines to adhere to. A better idea is to look at:
Why banks reject so many Business Loan requests of SME owners
And try to turn the tables around in your favour:
Bad credit
Credit history is the first thing that any lender notices when considering your loan application. A good credit score is the proof of your financial stability on both personal and professional front.
The fact that you have made on-time payments and avoided bankruptcy earns the lender’s confidence.
A poor credit score, on the other hand, reveals your mismanagement of finances and makes the lenders wary of trusting you with their money.
It is advisable to pay bills on time, control Credit Card balances, and correct any mistakes on credit reports to repair a low credit score before you Apply for a Business Loan.
No business value
This is the lender’s lack of confidence in your vision. The lender fails to see enough value in your business and is not convinced about its growth potential.
The estimation of this potential is made through your financial statements, market capacity, financial ratios, profitability, and so forth.
If lenders are not able to foresee any likelihood of growth in these documents, they doubt your ability to refund their money and therefore, think it better to reject your loan application.
Lack of collateral and experience
Banks trust owners with an established business and valuable collateral the most. Unfortunately, SMEs are just the opposite of that.
They often lack any collateral in the form of either equipment or property which is up to the lender’s satisfaction.
Additionally, the collateral is accessed by valuers hired by the bank, and the report they submit may well value your collateral at a much lower price than you take it for.
As for the experience, getting a small business loan on the traditional simple interest basis is difficult for entrepreneurs who have just started out.
At least two to three years of experience is required to stand a chance of availing such a loan.
Insufficient cash flow
All lenders are concerned with is getting their money back, and they know what all stands in their way.
On top of their EMI (Equated Monthly Instalment), they know you have payroll, rent, inventory, and various other expenses to take care of.
As such, even substantial cash flow may not be sufficient to meet all these demands. Therefore, lenders are more concerned about your business’s profitability than cash inflow.
One way for small business owners to ensure profitability is creating and sticking to a budget.
Business operations need to be optimised for maximum efficiency and times of weak cash inflow need to be met with a reduction in expenses.
Lack of preparation
Something small entrepreneurs are inexperienced at besides handling business is applying for a loan.
Most of them may apply for a Business Loan online or fill up an application in a bank and wait for the approval. However, the process is much more complicated and requires much more preparation.
A written business plan along with financial statements or projections, tax returns, bank statements, and personal and business credit reports are the must-have documents when applying for a loan.
Add copies of legal documents to the list as well, including articles of incorporation, leases, contracts, or any permits or licenses your business has acquired to operate.
Outside conditions
Your loan application may be turned down despite a commendable credit score, valuable collateral, strong cash inflow, and all the necessary documents.
Bear no grudges in such a case at this time, you were denied because of conditions outside your control.
Outside conditions include industry image, business location, competitors, and regional or local economic trends among other factors.
For instance, a small business owner looking to expand his food delivery business may be denied a loan due to the rising fuel costs.
The increasing costs are beyond the owner’s control, but the lender may feel insecure about his/her ability to afford the soaring prices and yet turn in a profit.