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Red Flags That Discourage Lenders to Approve Your Business Loan Application

Clix March 3, 2021

 

A large percentage of small businesses fail at times, due to no other reason than a simple lack of funds at the time of need. This can be an intimidating fact for the bootstrapped entrepreneurs. But in such situations, a business loan can be a lending hand in achieving your goal.

 

MUST READ: HAVE QUESTIONS ABOUT YOUR PERSONAL LOAN? FIND ALL YOUR ANSWERS HERE

That being said, securing a business loan is not easy. Although NBFCs have made the loan application and approval process extremely efficient, there are certain red flags that may discourage lenders to approve your business loan application. While you are trying to figure out how to get your business loan approved, here are a few things that serve as signs of danger for lenders.

Low Credit Score

For lenders, a powerful credit history is non-negotiable. If you have a low credit score, your chance of obtaining a business loan would be next-to-none. Most of the time, lenders prefer working with borrowers who have a credit score of at least 700. Besides that, they also want to ensure that you have a solid history of managing money, such as paying credit card bills on time. A credit score under 700 is a strong sign to the lender that you are a high-risk borrower.

If you have a low credit score, good news for you is that you can still repair it by making a budget, reducing your debt burden, paying bills on time, and checking your credit report for any errors. Check your credit score and use the tips mentioned in this blog to improve it.

New in the Industry

If you are just starting up a business with no experience, don’t be shocked if your loan application comes back with a rejection. Most lenders prefer experienced and established businesses with at least 3 years of business vintage. Lenders need confidence to ensure that you have a good footing in the industry and you will be successful in repaying your loan. This is the reason for the importance to credit history and scores.

Another piece of the puzzle is your experience in the industry. If you have been running the business with profit for years, the lenders will not have any qualms about extending the financing you require.

Negative Cash Flow

Negative cash flow is one of the brightest red flags for lenders because this may come across as a situation where you will use the cash to meet your expenses instead of repaying your loan. Lenders prefer more frequent cash incoming and outgoing from your bank account on a daily or at least weekly basis. A consistent flow of cash is indicative of the fact that you will be able to handle your periodic payments with ease.

In case you have negative cash flow, you may improve it by setting sales goals, implementing payment policies, accepting payments online, etc. Once you improve your cash flow, you are good to go with your business loan application.

Lack of Preparation

Lenders will not approve your business loan if you do not have a robust growth plan, financial projections, or market foothold. If you are applying for a business loan, be prepared to explain why you are taking the loan, where you are going to use it, and how you will repay it.

You can apply for a collateral-free business loan from Clix Capital and use the loan amount for any purpose you want, ranging from buying inventory and opening a new branch to building working capital and purchasing machinery or equipment. Whatever your purpose of taking the loan is, you must be able to explain it clearly to the lender.

Judgments or Bankruptcy

If you have had a credit judgment on you or have declared bankruptcy a few years ago, lenders may consider it as a red flag to approve your application. Such entries stay in your credit report for several years, during which you may not get a loan easily from any lender. It is advisable to use this time to rebuild your credit history and improve your credit score.

Lack of Documents

Before approaching a potential lender, you must be organized. This means getting ready with all the documents necessary for a loan application. A common red flag that lenders look for is not having documents required by them. Lack of documents indicates poor organization in the business. One possible solution would be to look for a lender who has minimal documentation requirements. One such lender is Clix Capital, which requires only the following documents to approve your business loan application:

    • Completed loan application form
    • Passport size photograph
    • Identity Proof, which may be your Aadhaar Card, PAN card, or government ID if you are a government employee
    • Address Proof, which can be your Aadhaar Card, passport, driving license, voter ID card, or utility bills for the last 2 months
    • Proof of Ownership
    • Financial Documents, which include the following:
    • PAN Card for a firm, company, or individual
    • GSTIN
    • 6-months bank statement
    • Copy of the most recent Income Tax Return form
    • Computation of income, audited balance sheet, and profit & loss account for the last 2 years
    • Proof of continuity of the business of 3 years, which can be your sales tax certificate, establishment, ITR, or trade license

Mismatched or Missing Business Details

While applying for a business loan, pay attention to detail. Although it might sound silly, you may have your loan application rejected if the business details are not exactly the same on each page. Pay extra attention to the business name, license number, business address, contact details, email address, website URL, etc.

Lenders look for perfect matches. If some details do not match, or if anything is missing, the lender may deny your loan. Copying and pasting can be the best way to mitigate such discrepancies and mismatches.

So, if you are looking for a collateral-free business loan to expand your enterprise, Clix Capital can be your most trusted partner. However, keep a check on the above red flags to maximize your chances of approval. If you are sure your loan application does not have any of these, apply for a business loan from Clix Capital and let your business grow.

 

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You can also reach out to us at hello@clix.capital or call us at 1800 200 9898

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