Avoid Business Loan Rejection! Useful Tips to follow

By Om Chaudhary - 13 Aug 2021 Last Updated: 19 Sep 2021
Avoid Business Loan Rejection! Useful Tips to follow

One of the most difficult and gratifying activities to do is starting a business. While most people never get the chance to start their own business because the route to prosperity is a steep uphill fight for them. It takes a lot of money to start a business, and with commercial lending on the upswing, there's never been a better moment to try to get a business loan. Applicants, on the other hand, are frequently turned down by lenders and denied company financing. While it is true that faulty business ideas should not be provided business loans, many times it is the applicant's mistake rather than the business's idea that is denied.

Thus, there are steps you can take to improve your chances of acceptance the next time you apply. Let's look at why your loan application was turned down and what steps you should take next. So without any further ado, let’s learn.

Primary reasons why your Business Loan was rejected.

Business Loan was rejected

LOWER CREDIT SCORE

A low credit score is the most prevalent reason for loan refusal. When analyzing loan applications, banks look at the personal credit score of business owners. Personal credit score is a consideration when applying for a small business loan, a startup, or even a firm that has been in operation for a long time. The reasoning behind this is that if you can't manage your personal credit, how can you be trusted to repay a corporate loan? Lenders often look into business credit accounts to see if there are any potential defaults.

How can you fix it?

If a poor credit score is the reason for your loan denial, improve and check your credit score by paying bills on time, minimizing outstanding debts, and maintaining a clean payback history. Make timely payments if you have any credit cards or personal loans in the UAE. Avoid bankruptcy, delinquency, debt payback delays, and other circumstances that can negatively impact your credit score.

ABUNDANCE OF DEBT

When you apply for a loan, lenders look at your monthly financial commitments, and if it appears that you won't be able to pay them, your company loan will be denied. The credit utilization ratio is also taken into account by lenders. Lenders always want you to use no more than 30% of your whole credit limit.

You are deemed a high-risk candidate if you use all of your authorized credit limits. Higher credit utilization indicates a higher risk, which may result in your loan being denied. On the other side, if you don't have a track record of making timely credit payments and have no debt, your company loan application may be rejected.

How can you fix it?

Making timely payments and keeping track of total credit limitations, which include personal credit cards, business credit cards, lines of credit, and other sources of credit. Having a decent debt - management practice will help you create a good credit score over time.

INADEQUATE COLLATERAL

A company asset, such as an investment, retained income, property, automobiles, and other assets, is referred to as collateral. When it comes to business loans, lenders require collateral security. If you don't have enough collateral, your business loan will be denied.

How can you fix it?

If you don't have enough collateral, seek for other options like unsecured loans, which don't demand any security.

UNFINISHED APPLICATION

It may appear absurd, but failing to offer sufficient backup information or providing complete details in the application form is the most prevalent cause for lenders to decline loan applications.

How can you fix it?

Supporting documentation such as three to five years of business plans, business bank account statements, personal tax returns, financial projections, business credit reports, and other data are requested by banks. Business legal documents such as permits, leases, contracts, and other business paperwork are also reviewed by banks. So, before you apply for a loan, make sure you have all of your documents completed. Lenders approve business loans based on a number of factors, and if any of these factors are not met, the loan may be declined.

The easiest way to get your loan authorized is to complete research on your business and lenders, then apply for a loan by completing the eligibility criteria.

YOU DID NOT REQUEST ENOUGH FUNDS

You might be surprised to learn that banks sometimes reject loan applications because the amount requested is insufficient. The rationale is that the cost of servicing a tiny loan is simply not worth it for banks. Small loans to enterprises are not approved by major banks.

How can you fix it?

The key concern is how much the bank will authorize for a loan. The ideal technique is to go over your financial estimates and business plans to make sure you're not underestimating the amount of money you'll require. To obtain small business loans, look for alternative finance sources such as micro lenders or apply for invoice-based financing options.

NOT PRIORITIZING THE BUSINESS ENOUGH

If your company is brand new, you might not be able to get a business loan because you don't have any credit history. Some lending organizations may only approve loans if you have been in business for a year or three years.

How can you fix it?

Finding the proper lender for your scenario can help you start and run a successful business. Some lenders want more experience in the industry than others. So, when determining where to apply for a business loan, consider all of your alternatives and pick the one that best fits your needs.

BUSINESS PERFORMANCE IS POOR

If a company has little sales and its operating cash flow statements reflect that there is no money for day-to-day operations, the company will be unable to repay its debts. Cash flow issues are common in business, but if your company works on these red lines of low cash flow, your lender may refuse to approve your loan.

How can you fix it?

If you have an established business or are starting one, you should ask vendors to record payments to business credit agencies so that you may build up adequate credit history and easily qualify for a business loan. In most cases, vendors do not automatically record your payments to credit bureaus. When dealing with new vendors/suppliers, ensure that they record all of your payments to credit bureaus so that your company can establish a solid credit score.

Other Relevant Reasons

  • There are a few major drawbacks to submitting a large number of loan applications. When you apply for loans with multiple lenders one by one, your credit score will suffer. That implies you'll have a worse credit score and have a harder difficulty being approved the following time around. If you send several loan applications to the same lender (whether on purpose or not), the lender will almost always decline you right away. In the view of lenders, a ‘desperate' borrower is usually not an indication of a ‘good' borrower.
  • Lenders may require that you use no more than 30% of the entire credit available to you. If you use more than this, they may consider you overextended and worry that you won't be able to pay your bills. However, if you use too little credit, you risk not having a history of responsible credit usage.
  • This is the primary reason why new businesses are sometimes denied advances since they haven't been in company long enough. The longer you've been in business, the more secure you appear to a loan officer, so time is your ally here.
  • There are certain enterprises that are considered high-risk by specific banks and are thus largely avoided. This is especially true for more traditional financial institutions. The construction industry is one example of a company sector that different lenders refuse to lend to, and Carillion's new collapse has only served to exacerbate an already tense situation.

However, just because you work in a sector that is regarded risky by lenders doesn't mean your search for funding has to end here. There are specialist goods in select banks that give food specifically for these kinds of projects.

Our Construction Finance item is a customized subsidizing solution for both for-hire and sub-hire workers in the construction industry. Cafés are regarded as a high-risk industry due to the high percentage of customer dissatisfaction. We addressed the significant challenges that restaurateurs encounter in our café centre, as well as how our Business Cash Advance can assist alleviate the concerns that frequently arise.

Conclusion

According to World Bank standards, doing business in the UAE is simple, which is why the UAE is placed 16th out of 190 nations in terms of ease of doing business. So don't be afraid to ask for a loan and if you apply the above mentioned tips, you can surely get a Business Loan with ease. We hope this blog provided you with incite full information. For more information on other related aspects, feel free to check out our Website as well.

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