Reasons lenders deny loans to small business owners
For small business owners, loans are a mean to fulfil a short-term credit crunch, acquire assets and start new operations. As maintaining a constant cash flow is a challenge for small businesses, they often rely on working capital loans. However, there are occasions when lenders refuse to sanction credit. Here are somethings that put SMEs in such a situation:
Poor credit score
A credit score is the measure of the creditworthiness of an enterprise. A poor credit score does not help matters. Today, lenders look at personal and business credit scores while making lending decisions and determining the rate of interest.
Various credit bureaus are entrusted with the job of scanning through your credit history and preparing the credit score. Late payments, defaults, delayed payments, spending beyond credit limit, and bankruptcy contribute towards a poor score.
Lack of business value
Lenders are apprehensive about lending to businesses they do not foresee creating value and growth. These insights are evaluated based on the company’s order books, market size and financial performance. Some lenders might have specific focus and expertise in lending to a particular sector.
Limited cash flow
Weak or sporadic cash flow can dent the chances of availing finance. Lenders like to be assured that the business will generate adequate cash flow for honouring their re-payments. In case the company does not have an immediate cash flow, they can offer a projected income based on the future developments once the loan is sanctioned.
Financial institutes see many businesses as risky ventures because of their nature. Those venturing into restaurants, apparel stores, tours, and travels, etc., might find it difficult to convince lenders. Post the financial crisis in 2008, lenders have become more risk-averse and prefer staying away from ventures which they perceive are not going to pay off.
Lack of collateral
Financial institutes often require collateral (an asset) they can fall back on if the loan is not repaid. This reduces the risk of lending and paves the way for a reduced rate of interest. Borrowers not willing to offer a collateral might not be able to avail a loan. Lenders generally have their own team of assessors who value the collateral.
No proper documentation
Documents establish credibility. Most lenders have a prescribed list of documents, certificates, statements, and reference materials that need to be furnished. Lack of proper documentation can result in a denial.
A negative reputation
A negative image in the market can hurt borrowers. Smart lenders are seeking client testimonials, scanning the Internet, monitoring social media, and even tracking the spending habits of the promoters of a company seeking the loan to establish their creditworthiness.
Reliance Commercial Finance is a trusted name when it comes to MSME loans, SME loans and SME finance. Talk to us today to know more.