Reasons for rejection of business loans

Reasons for rejection of business loans

A business loan is a type of loan used by an individual or else proprietor to purchase new machinery, buy commercial space, or else for the stocking up new inventories. Banks or lending financial institutions lend loans easily to borrowers to expand their existing businesses or start a new business. Banks are searching for the right vendors for the disbursement of loans, as in other cases, banks may reject the borrower’s loans. Proper documentation is also a necessary part of the loans process. The banks provide the loans at interest rates of 11%-24% per annum in the case of secured loans. At the same time, unsecured loans without proper documentation can be provided at even higher interest rates as high as 30% per annum to the borrower. The banks also charge specific processing fees for the disbursement of loans. The banks also expect that the borrower should have a good track record of the CIBIL score. If the CIBIL score is less than 700 points, then, in that case, the borrower’s loan may be rejected. As in the case of a low CIBIL score, it indicates that the loan applicant has defaulted on some loans or has made delays in the repayment frequently for the loans. 

In recent time’s post-pandemic, the government of India has taken a significant initiative for the disbursement of business loans to MSME’s and start-ups to push the business activity in the country and create more opportunities in the country. Thus for the distribution of the loans government has tied up with many banks for the disbursement of loans to MSME’s. The government wants to promote business activity in India, and thus the government also provides a subsidy for entrepreneurs who avail loans for the business purpose. Both the service sector and also the manufacturing sectors can help with loans subsidy from the government. The government indirectly benefits from the tax collection through MSMEs and thus wants to promote MSME businesses. Banks can provide loans to an entrepreneur up to Rs.75 lakh depending on the borrower’s repayment capacity. The actual limit can only be decided on the capacity of the borrower to repay the loans. If the loans are demanded to exceed the borrower’s repaying capacity, then the loan application can be rejected by the banks. 

The following are the reasons for the rejection of the loans from the bank

Low credit score:

If the borrower’s credit score is low, then, in that case, the lender may reject the applicant’s loan. The bank expects a minimum credit score of 700 points in case of approval of loans. Most of the banks the public sector banks or else private banks do not accept the loan application of applicants with CIBIL scores of fewer than 700 points. Other lenders may sometimes lend with higher interest rates of up to 30% per annum. 

Having excessive debt:

If already having the loans running, the borrower cannot avail of new loans as the repayment can be beyond the capacity of the borrower. Therefore, banks usually prefer to offer loans to only those debt-free borrowers and do not have any outstanding loans while applying for new loans.

Insufficient cash flow:

If the current business turnover is too low, then, in that case, the lenders may not have confidence in the repayment of the loans. The borrower if not have sufficient turnover, or else if the business is found to be loss-making ones, then, in that case, the loan application may be rejected. 

Tax default on income tax:

If the borrower is not filling ITR returns on existing business, then the banks cannot proceed with the loan application. As a result, the banks always reject the banks’ defaulters as they do not disclose their actual income, and thus the loan application is rejected. 

No concrete plans while starting a business:

If the borrower is not having a concrete plan for the business or else the business idea seems to be a failure, the bank may be reluctant to provide the loans. However, in case of rejection of loans from one lender, another bank may accept the loan proposal sometimes. 

If an excessive amount of loans is demanded by the borrower:

Suppose the applicant is demanding a too high amount of loan from the lender, which can be beyond the capacity of repayment; then, in that case, banks may reject the loan application of the borrower. Banks should be taken into confidence by the borrower by explaining the business’s concrete plans and showing up the assets to mortgage to bring the bank into confidence to approve loans.

Availing of loans is a too-early stage:

The minimum age criteria for availing of loans are 21 years of age. Also, for borrowers beyond the age of 21 years, the applicants who begin with their entrepreneurship journey and want to avail the big amount of loans without a proven track record then, in that case, the loans may be rejected. 

Thus, we can conclude that the applicant should have concrete plans for the business before applying for the loans and have a good credit score. The loan amount used should also be in proportion to the borrower’s repayment capacity to avoid the rejection of loans. Banks should be taken into confidence before the approval of the loans; then, only the proposal of the loans can be accepted.