Over the past few decades, the business climate has become favorable for business people. However, availing of a loan may not be more accessible for all first time business owners. Interestingly, there are several ways by which entrepreneurs can benefit from quicker and hassle-free loans than ever before. On the contrary, there might be scenarios when a lending institution rejects a loan and might not provide a clear explanation for why there is a rejection of the loan application. Hence understanding why lenders would decline your application becomes vital. Below are the reasons why there might be a rejection of the proposal:
Reasons Your MSME Loan Application Maybe Rejected
1. Bad CIBIL score
The credit score of the applicant plays a vital role in the loan application process and can vary from a lower score of 300 to the highest score of 900. Any score of more than 750 is considered as a preferable credit score by the lenders. Reasons for low credit scores might constitute a lack of considerable financial history, missing bill payments, not maintaining the credit utilization ratio. Hence, you must know your credit score and review from time to time. With healthy credit practices and paying bills on time, you can increase the credit score gradually. An MSME lender would be primarily looking at CIBIL rating compared to other factors in the lending process, and hence a low CIBIL score would be a substantial hurdle in the loan processing.
2. Weak business profile
Much like an optimal personal credit score, an organization must also have a strong financial record for the lender to assess and determine the risk factors. Most experts claim that a company must be at least more than three years old to qualify for a significant loan amount from a structured credit facility. Hence you would need professional advice to ascertain the financial standing of your business before applying for MSME loans.
3. Revenue fluctuation
Another aspect that might prohibit the organization from obtaining MSME loans is if the company’s monthly income is dynamic. Ideally, financial institutions would like to approve loans to an organization that can maintain comparable profits on a month-to-month basis. The reason is that such a performance provides confidence for the lenders to sanction more loans in the future.
4. Financial management issues
Maintaining acceptable financial practices is a perfect way to prove to the investor that there are zero risks with your transactions. Make sure that you maintain the right balance to cash out any checks, pay your credit card bills periodically, and pay your EMI (installments) at the scheduled time to show better financial discipline. Effective financial management of an organization creates a sense of trustworthiness, thus making sure that there is a smoother transaction between the borrower and the lender every single time.
5.Lack of a clear business strategy
Note that it is always wise to build a comprehensive business strategy before opting for financial aid. Before submitting the documents needed for business loan eligibility, you should carry out an in-depth analysis of the market factors which would help you to take an impartial and realistic view of the market.
6. Too many debts
A lending institution is very particular about providing financial assistance to companies that do not have too much debt accumulation in the past. The lenders can label a borrowing company’s profile as risky if they have multiple debts and still have applied for a new one. Hence an SME company should address such current obligations before signing up for a new application form.
Knowing the essential to-do’s, before applying for an MSME loan would save a business owner from the hassles of multiple loan applications and rejections.