Obtaining a Business Loan can be a complex process, even for seasoned borrowers, and it is essential when your lending institution is a bank. Business Loans are invaluable for addressing various financial needs, from cash flow management to expansion plans and other essential business requirements.
However, navigating the loan application process can be challenging, and not all applications gain approval, especially for borrowers aiming to kickstart a new business venture.
Let’s explore the common hurdles borrowers often encounter when applying for a loan for business from a bank and strategies to overcome these challenges.
Borrowing From Multiple Sources
Banks often need help approving loans for businesses that already have debt from multiple sources. This is because accumulating excessive debt can disrupt the Debt-to-Income ratio, a crucial factor in the bank’s lending decision. The bank’s primary concern is to ensure that it can recover the loan along with the interest.
To mitigate this issue, it is advisable to approach banks for loans only after clearing existing debts or ensuring that the current debt level represents a reasonable portion of the business’s total income.
Low Credit Score
Credit scores are pivotal in loan applications, especially when dealing with banks. Traditional lending institutions generally seek borrowers with a good credit score, a challenging criterion to meet. A higher credit score indicates strong creditworthiness and a higher likelihood of timely loan repayment. A low credit score is a common reason for loan rejection by banks in many cases.
The good news is that there are effective strategies for improving your credit score, including making on-time debt payments. A higher credit score can also lead to lower commercial loan interest rates.
Inadequate Collateral
Banks offer various types of loans to support businesses, and some of these loans may require collateral as part of the lending criteria. While collateral is a standard practice to secure loans and mitigate risks for banks, it’s essential to recognise the positive aspects of this requirement.
Collateral provides stability to the lending process and allows banks to offer more competitive interest rates and better loan terms to businesses. It also reinforces the mutual trust between banks and their clients, fostering a strong and reliable financial partnership.
Insufficient Cash Flow
Consistent and sufficient cash flow is a key consideration for banks when evaluating loan applications. A steady cash flow is essential for meeting loan repayment obligations. Businesses with low or inconsistent cash flow often face rejection by banks unless they can provide substantial collateral to secure the loan.
Requirement of Personal Guarantees
Banks often require business owners or promoters to provide personal guarantees when applying for a business loan. Without a personal guarantee, a loan may be rejected or may carry a higher commercial loan interest rate.
A personal guarantee makes the business owner personally liable for repaying the loan if the company is unable to make payments. While some business owners may hesitate to make such a personal commitment due to the significant financial responsibility involved, banks often require it as a standard practice.
Short Operating History
Banks generally prefer borrowers with a well-established business track record. A company’s operating history is a crucial factor in the bank’s assessment of its ability to meet future loan commitments. It can present challenges for new businesses with a limited operating history when seeking loan approval.
Weak Sectoral Performance
Banks carefully evaluate the sector where loan applicants operate, considering the current operating environment and the sector’s future outlook. Businesses in declining sectors may need help securing loans, as some financial institutions have strict lending criteria. A weak sector can impact a company’s overall prospects, affecting the bank’s ability to recover the loan with interest.
Obtaining a Business Loan can be a challenging process at times. However, banks offer numerous benefits, such as competitive interest rates and comprehensive financial services.
Borrowers aiming to secure a loan for a new business venture should be prepared to address these challenges, often by presenting a solid business plan, offering appropriate collateral, and demonstrating a strong cash flow history. It can improve their chances of securing the essential financing they need to launch and grow their businesses.
You should often check out apps like ICICI Bank’s InstaBIZ app that specialise in this type of lending to get what you need. Many Banks in India have offerings that can help borrowers get precisely what they need.
What did we learn?
Twitter
