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Home » Everything you need to know about business lending, including suggestions on how to prevent loan rejections

Everything you need to know about business lending, including suggestions on how to prevent loan rejections

Business Loan

What is a Business Loan?

A business loan is borrowed money that businesses use to pay for expenses they can not cover on their own.

How do Business Loans work?

As defined, when the business owner does not have the required funds to operate, they seek the required funds from the lending institutes. The lending institutes provide the businesses with the sought requirement, typically to help businesses with the short-term finance requirement for the operational process.

When the businesses need more funds to meet operational expenditures for the acquisition of equipment or streamlining the operational process of the business, the loan may be extended. Some examples include money for payroll or purchasing supplies needed for manufacturing and production.

How do Lenders consider the business lending requirement?

The most important factor lenders consider for lending the businesses the business loan is the business’s creditworthiness. Most frequently, the loan applicant will need to submit balance sheets and other similar documents as evidence of the company’s favourable and consistent cash flow.

This assures the loan provider that the debt will be repaid following the terms of the loan. Commercial property, equipment, or other assets that the lender would lose possession of in the event of failure or bankruptcy are commonly required as business-post security for these loans.

Is there any other business loan that does not need any collateral?

Yes, there are certain loans, that are granted without asking for any collateral, and this comes comes under unsecured business lending

Let’s try to distinguish between a Secured business Loan and an Unsecured Business Loan

Secured Business Loan: When you apply for a secured business loan, which is protected by a guarantee, an asset is pledged as collateral. For instance, you must mortgage the property you ownto get a loan for your business. By providing a personal guarantee or collateral to the lender, you reassure them that you will pay back the borrowed funds. If you are unable to repay the loan, your lender is free to take legal action to recover their losses using the pledged asset or your guarantee.

With a secured loan, the risk is transferred to the borrower. With an unsecured loan, the lender bears a greater portion of the risk. Several factors, including the sort of lender you work with, the assets you own, your plan for using the money, your credit history, and the condition of your business, will determine whether you opt to receive secured or unsecured loans and whether these loans are available to you. You’ll find a variety of possibilities, including high-risk loans and loans that are a little bit simpler to manage, within both major categories of loans, of course.

Unsecured Business Loans: A business loan issued without receiving any kind of collateral is called an unsecured loan. Here, the bank or lender depends on the borrower’sability and creditworthiness to repay the loan. The bank or lender may occasionally demand personal collateral in exchange for giving the unsecured business loan if the applicant cannot demonstrate their creditworthiness or stability of income. Any business, organisation, or person may obtain an unsecured business loan for several reasons, such as

  • Upgrading the business inventory

  • Purchasing new machines or equipment

  • Increasing activities in new areas

  • Constructing corporate facilities and infrastructure

  • Increasing the need for working capital

  • Buying stocks or other assets

Why your business loan is getting rejected?

Lack of Effective Business Plan: A well-thought business plan creates a great image before lending institutes. A good business provides a clear blueprint of how the business would run, and what would be procedures and guidelines. It would include detailed information about all the aspects, including operation, marketing, finance, and other operating procedures.

Any lending institution will need to know exactly what kind of business you are looking for a loan for. A well-written, concrete self-drafted business plan should be available when submitting a loan application if you want to create an impact.

For banks, approving loans to business owners or entrepreneurs without a business plan or inadequate financial information becomes challenging. These factors increase the difficulty, uncertainty, and risk for the lender when granting loans.

Low CIBIL Score: Bad credit scores are one of the worst aspect, that impacts a loan application. A bad score might reject the loan application. A minimum CIBIL score of 750 is required to approve a business loan. Those without credit scores between 700 and 900 may not be qualified for business loan.

Incomplete Application form or Documents: Applicants must provide all relevant loan documentation, as stipulated by the lender, together with their loan application form. It is required to send all actual, requested papers along with the information requested on the application form. No documents should be presented to any financial institution that is incorrect, missing, false, phony, or forged. The likelihood of a loan denial is clear, just as during the verification procedure.

Lack of Collateral: Furthermore, not all banks provide unsecured company loans or loans without security or collateral. To apply for secured business loans or loans with collateral, start-ups, business owners, and enterprises must first collect enough collateral to deposit as security for the loan amount. Again, the applicant’s insufficiently provided collateral will also cause the loan to be rejected.

Your options for collateral include residential or commercial real estate (a house, an office, a piece of land, a store, a godown, a warehouse, etc.), raw materials, goods, gold, stock, inventory, a car, equipment, or machinery, among other things.

Weak Cash flow: The major factor used by the lender to assess your loan repayment capacity is business cash flow. Lack of cash flow causes the bank to lose faith in you, leading to loan denial. Maintaining a healthy cash flow is important by setting up the right invoicing and cutting down unnecessary costs.

New to Credit applicants and start-up businesses: Customers who have never used credit before or currently do not have a credit/CIBIL score are considered “New to Credit.” Because banks view these clients who desire to launch their businesses as high-risk applicants, they may have trouble getting loans approved or experience loan refusal.

As a result, new businesses or applicants who are “New to Credit” or are unfamiliar with the banking sector should begin by using simple loan products like credit cards and maintaining small deposit accounts in their names.

Customers should avoid using their credit cards at a high credit utilisation ratio of more than 30% of the total sanctioned amount.

Businesses with High Risks: Before approving loans to high-risk firms, lending institutions carefully consider their options. When we talk about high risk, we mean that the only economic element that affects the business is that situation.

It is not possible for banks or NBFCs to provide business loan to start a gym, salon, restaurant, movie, travel agency, hotel, retail centre, etc. If we take today’s COVID-19 situation and its associated challenges—such as lockdown and a lack of vaccines—into account.

Simple economic or environmental conditions prevent these firms from being started or opened, which is the only explanation.

The lender views these kinds of firms as high-risk undertakings.

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