The business loan that you’ve applied for doesn’t need to get approved. The chances of getting it passed are quite less, most of the time, especially for startups and small businesses. There could be multiple reasons for this rejection, including but not limited to low credit scores, weak cash flow, length of time in business, etc.
However, a loan rejection is not the end of the world and here are some alternatives you can try. There is a list of some tips which can help you to approval your business loan application. Go through the mentioned suggestions:
Tips To Follow If Business Loan Application Gets Rejected:
1. Observe your business from the NBFC’s perspective
Looking at your business from the lender’s perspective can give you an idea about where your loan application has gone weak. Get in touch with the NBFCer and ask for an explanation for the rejection of your loan application. Ask them how you can improve your future loan application, or what aspect would create a stronger profile for you. If the lender seems to have insecurities about your business being a standalone venture, using your personal assets might work. Proving your genuineness to the lender might help you in the long run.
2. Watch the basics
There are some factors such as cash flow profile, time in business, seasonality, and available assets, which are considered by NBFCs while underwriting. For uncollateralized cash flow loans, your business must have been a profitable operating entity for at least the past 2-3 years. The rest of the criteria include customer concentration and contracts. If your business holds assets like accounts receivable or real estate, NBFCs will be flexible in their underwriting. It’s essential to understand the difference between short and long-term loans and what underwriters look for in terms of business fundamentals. Short term lenders rely on your monetizable assets to make a quick approval decision. However, most NBFCs make long term loans and require cash flow to cover the interest expense and amortization, which, by default, takes a long time. A majority of the lenders are looking for a coverage ratio of at least 1.5.
3. Pay attention to your tax strategy
You can reduce your tax burden by deducting everything you can from your business’s income, and that’s precisely what accountants are trained to do. However, keeping in mind that every deduction reduces your business’s revenue on paper, this strategy can backfire when you apply for an NBFC loan. Lenders consider your tax return income as a measure of profitability, and most NBFCs don’t lend to unprofitable businesses without any collateral. So discuss with your local NBFC if deducting less income in a year to show some tax profitability is worth it from the perspective of an underwriter. If you need a business loan, enduring the tax costs makes sense. NBFCs also take notice of your historical revenue on your tax return. So if you submit returns for multiple years, they will observe your sales pattern, and if your income is stable or growing each year, it will be considered as a plus point to your loan application.
4. Watch your personal and business credit score
Credit scores are the reason why some small businesses are denied loans at an NBFC. NBFCs are extremely risk-averse, and your business or personal credit score matters a lot to them. FICO scores below 640 can be troublesome in getting a loan approved. Personal credit scores around 700 are looked at warily by many NBFCs. You can also improve your business credit score by paying your vendors and suppliers on time and keeping your credit utilization around 25%.
These are just some tips to follow when your loan application is rejected. However, to avoid the chance of rejection you must have to apply after checking the business loan eligibility. You can also look for other financial sources like crowdfunding and angel investing. These sources are useful for funding new businesses when there’s no loan available.