It is disheartening to hear a ‘No!’, be it a business deal or your funding application. But it is a common occurrence in businesses to meet with a negative remark. Moreover, accepting the ‘No’ and taking the corrective steps is more important.
Same is the case with your business loan application. There are reasons as to why your SME loan application got rejected. Your entire focus should be understanding the reasons and correcting them with utmost priority.
Let us look at some reasons that may be the cause for any rejection in your MSME Loans or SME Loan application.
Low Credit Score
The credit score is a major factor in getting approvals for your SME loan. Lower credit scores represent lack of financial prudence. Before making a loan application, get your credit score checked from a reputed credit rating agency. A higher percentage of borrowings as compared to your income may often lead to rejection of your MSME loans.
Insufficient Cash Flow
Every business entity needs to analyse its cash flow. Analysis of your cash flows represents the repayment capacity of your borrowings. This is represented by the Debt Service Coverage Ratio (DSCR).
DSCR depicts whether you will be able to repay all your borrowings in the stipulated time or not. Insufficient cash flows affect the confidence of your lenders for repayment of their loan. Your cash flow can be improved by reducing unnecessary expenses, maintaining a proper system of invoicing to track receipts along with setting up a contingency fund in times of slack periods in the business.
The amount of existing borrowings affects the capacity to further borrow. Lenders get worried watching the pile of debt on your business and maybe reluctant in lending you. This can lead to a rejection of your loan application. You can maintain a good track record of repayments with very little to no defaults. This can help you in gaining the confidence of your lenders.
Lack of a Concrete Business Plan
When you apply for an SME loan, it is prudent that you have a concrete business idea. The application of your funds so borrowed is crucial for the lenders. An in-depth market analysis along with a thorough understanding of the competitors in the industry can help you in designing a reliable business plan.
Early Loan Application
The creditors analyse your past performance of your organisation while sanctioning your loan. In the case of new start-ups, there is no past performance and in such a case, the reliance can be placed on the business idea. For such times, obtaining funds from venture capitalists, or crowdfunding can be done initially before applying for an SME loan.
The above reasons can be analysed when you make your subsequent SME Loan application. Do not forget to seek the reasons for rejection. This can help in taking the appropriate corrective measures while seeking a business loan.