You are an entrepreneur aspiring to start your business. You approach a financial institution for a business loan. But the application for loan gets rejected. No one likes to be rejected. And to hit a big hurdle right at the start is the last thing you would want. Even if you are looking for expansion of your business you may want to take a loan from a financial institution. All money lending organizations would obviously want to secure the loans without having fears of not getting repaid. So here are the most probable reasons why top finance companies in India would reject your loan. Be aware and prepare your case.
Like everyone else, banking institution would want to be safe than sorry. If you as an individual or a business have a bad credit history i.e. you have defaulted on your earlier loans or do not have a complete closure of your past loans then there are very high chances of your loan getting rejected.
Ensure that you always have your credit history clean.
Too many loans
Many financial companies have policies which do not permit additional loans, if you already have drawn loans in the previous year. Also debt to income (DTI) ratio plays an important role. It is a metric which checks how much of your income is currently being used to repay loans. If this ratio is more than 50%, high probability that your loan would be rejected.
Pay your taxes on time. You need to provide 2 years of history of income tax filing to the bank to get your loan sanctioned. If you have do not have that track record, your loan may get rejected right away
You have defaulted
If you were a guarantor for a loan which has defaulted in its payments, then you have a problem. Guarantor is considered equally responsible for repayments and hence it will impact your future loan applications. Also, if your address matches with the address of a person who has been blacklisted by banks due to a bad history, it may influence your loan as well flagging you as a credit risk.
If you do not have a proven track record for your business, it is difficult for the banks to have the confidence on your loan repayment capability. You need to back your loan application with a solid business plan and strategy. The plan should be viable enough for the bank to consider an investment. So be well prepared.
Lack of guarantee
Banks often need some guarantee in form of an asset which they can use to recover their loan in case of failure to repay. Start-ups especially may not have enough assets to have them listed as a guarantee and get the loan approved.
Lastly, does your business qualify for a loan? The bank may be investing only in certain type of businesses, sectors or business sizes etc. which may cause a rejection.
Getting business loans is not a cake walk. But you need to have your facts right and be well prepared. Awareness is the key and once you are, there is no stopping you!