5 Common Reasons Why SME Loans Gets Rejected

Financial institutions in India are reluctant to provide big-ticket loans to small and medium enterprises. As per a report, the propensity to lend money to these businesses dropped between FY2019 and FY2020. The primary reason partly lies with the slowing economy, which can be discouraging for lending institutions.

SME Loans Gets Rejected

Therefore, securing an SME loan can be problematic, especially if the business in question fails to meet or exceed the various criteria set by lending institutions. 

If you are planning to avail such financing options, avoid the following mistakes, which can lead to loan rejection –

  • Unimpressive credit history

Financial institutions have no way of gauging the creditworthiness of a small or medium enterprise, apart from tracking its credit history. Therefore, if your company’s credit rating is below the minimum requirements of your chosen lender, acquiring a sizable loan can be almost impossible.

  • Between March and November 2019, gross MSME loans saw a sharp fall of 3.43%.

Such enterprises can take some time to improve their credit ratings, with careful and responsible usage of available credit. Timely repayment is the key to achieving the desired score. Likewise, maintain an extensive record of your company’s expenses to ensure a decent score on this scale. You should figure out what to do if your business credit score is low so that you can improve it and then apply for credit.

  • Lack of assets you can collateralize

Small and medium companies often fail to offer any security against the SME loan, because they lack valuable assets to pledge. Since the SME sector is considered high risk by most lenders, an absence of collaterals can reduce your chances of availing these credits significantly. 

If you want to avoid a business financial crisis, think of company assets that you can collateralize. For instance, equipment loans can allow you to avail of funds after hypothecating machinery that your business owns. Similarly, you can avail of such credits against an outstanding invoice amount, which your company is set to receive soon.

  • The high debt utilization ratio

The debt utilization ratio is nothing but the proportion of your company’s debt to its equity capital. If your business’s debt is too high, most NBFCs will shirk from lending you additional sums. This is because existing debt is a liability that your company bears, and it may not be able to withstand the financial pressure of another loan. 

  • In March-end 2019, the outstanding credit in the MSME loan segment was Rs.4.81 lakh crore. By the end of November, this outstanding dropped to Rs.4.65 lakh crore.

Therefore, the best solution to this is to avail a fresh SME loan only once you have repaid another due credit. Doing so should boost your lender’s confidence in your ability to service a new loan.

  • Improper bookkeeping

If you fail to maintain a constant record of your transactions, business financials, or profit and loss statements, securing a small business loan will become tricky and difficult. These documents prove that your business has the turnover you are claiming. NBFCs will want to check these meticulously to determine the risk of offering a loan to your company.

Thus, ensure transparency of your business’s financial details before opting for a loan. Moreover, ensure that tax liabilities are clear for your business as complications on this front may delay approval of the credit request.

  • Not adequate business experience

You will find that most NBFCs outline the minimum requirement when it comes to the age of business eligible for an SME loan. If you are just starting out on your new venture, you may face rejection on such credit applications. Lending to new companies is riskier than lending to a brand, which has navigated the sector successfully for some time.

Running a business successfully for at last 3 to 5 years will enhance your chances of availing the necessary finance.

Following these steps should help your business raise finance. Some companies even offer business credit cards to eligible applicants, which can act as a source for emergency company expenses. Still, the exorbitant interest rates associated with them can be difficult to bear, especially for smaller businesses.

Instead, you can inquire about Business Loans from reputed NBFCs, such as Bajaj Finserv. The company provides such credits without any collateral and at favorable terms.

The company also provides pre-approved offers to simplify the loan availing process, while making it less time-consuming. These offers are available on a host of financial products, including business loans and personal loans. You can check your pre-approved offers by submitting your full name, along with contact details.

Focusing on your business’s credit history should be your priority when looking for an SME loan. Defaults and missed payments make your company look bad as a borrower, and may prevent future loans.

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Article Author Details

Shailendra Kumar

Shailendra Kumar is an experienced Financial Consultant and Tech Reviewer who has 8+ years of experience in the field of finance, business, and technology. He is very passionate to write about Finance, Business, Technology, Gadgets, Digital Marketing, Fashion, Lifestyle, etc.