Small businesses have started to gain a greater footprint in the
domain of active commerce. At present, they employ about 120 million people in
India and account for nearly 37% of the country's GDP. However, when it comes
to getting financial backing, most small business owners find themselves in
troubled waters. Banks tend to reject their Business Loan applications,
and the businesses are left to fend for themselves.
Before we delve deeper into the major reasons why banks are
reluctant to provide loans to small businesses, it would be sensible to
understand what a Business Loan is and as a small business why must you Apply for a Business Loan.
What is a
Business Loan?
A Business Loan
is essentially a sum of money which you borrow from a financial institution.
This loan has a well-defined purpose and it can only be used for the different
aspects associated with a business. The loan can be both, secured and
unsecured, with either a variable or a fixed interest rate.
Why Must You
Apply for a Business Loan?
A Business Loan, unlike other financing options, can make funds
available in a shorter period and the entire loan amount can be disbursed in
one go. More so, availing a Business Loan also helps build a business's
creditworthiness which can further translate into greater investment.
Why Do Banks
Deny Loans to Many Small Business Owners?
Despite all the obvious benefits, many small businesses find it
difficult to secure a Business Loan. Though this can be attributed to a number
of factors, the primary reasons which lead to a rejection, from the least
significant to the most important, have been listed as follows:
1. Bank's own
security concerns
At times, the problem might not be with your proposal, but with
the bank itself. Recently, banks have become extra cautious about their role as
a lender. They ensure that all their loans are secure and they are usually
unwilling to lend to high-risk individuals or businesses. This has a direct
effect on their lending activities.
2. The nature
of the business
When you apply for a Business Loan, the bank determines the risks
associated with the sector that you are operating in. For example, if your
business falls under the PSL (Priority Sector Lending) category of a bank,
availing a Business Loan automatically becomes easier.
3. Borrower’s
repayment capacity
An important factor based on which a bank takes its financing
decision is checking the repayment capability of the owner of the business.
The credit history of the proprietor is evaluated and their creditworthiness is
determined. In case the owner has failed to repay loans before, it shows on
their credit score. The bank prefers proprietors who are creditworthy and free
of legal disputes or implications.
4. Lack of collateral
Small businesses are a risky investment. No bank will give you a Business
Loan if the collateral you have provided doesn't hold too much value. In case
you don't have something to offer as collateral at all, the bank will reject
your application outright. This is because in the incidence of the borrower not
paying back the loan in time, the cost of extraction becomes too high for the
lender to bear.
Also, no matter how much your collateral may be worth to you, the
bank will assess the value of your collateral independently and will take a
decision based on the findings of the assessment.
5. Low
business value
When you apply for a Business Loan, the bank begins to evaluate
your business's value. This includes analysing business plans, assessing future
growth, estimating profitability, and deducing market capacity. Like any other
investor, if the bank is convinced that the value of your business is low, it
won't consider you a worthy candidate for the loan.
6. Lack of a
business plan
The number one reason why banks deny loans to many small business
owners is that they do not have a fail-proof business plan. They might have a
broad and structured idea, but they lack a depth of vision. Banks tend to judge
a business plan on the basis of its bare essentials. These include operating
costs, wages to be paid, income expected, and the possibility of long-term
stability. This determines the repayment potential of a business. As most small
businesses don't tighten these loose ends while formulating a plan, their Business
Loan applications end up being rejected.
How Can MyMoneyMantra Help?
MyMoneyMantra can render assistance and help you overcome the limitations posed
by all the aforementioned factors. Here, you can find the best way to apply for
a Business Loan so that the chances of it being denied or rejected are
down to a minimum.
It is extremely important to be judicious when you are formulating
a proposal to apply for a Business Loan so that the bank has no opportunity to
shoot it down. After all, a business financing can be an active ingredient in
ensuring that your small business is both- lucrative and successful.
To apply online for Credit Cards, Secured Loans, and Unsecured
Loans, visit www.mymoneymantra.com, the leading online lending marketplace that offers financial
products from 70+ Banks and NBFCs. We have served 2 million+ happy customers
since 1989.
Talk to our Loan Specialists toll-free at 18001034004 to know more about our products and offers.
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