When a company is experiencing financial difficulty or is waiting to expand, a business loan may end up being the best option. A business loan may occasionally also prove helpful in ensuring that the venture takes full use of its prospects.
Business loans are available in India from banks and non-banking financial companies (NBFCs). The primary goal is to meet the immediate needs of a growing business. Most financial institutions offer term and flexi loans to meet a company’s commercial needs. Business loans are also known as commercial loans. Sole proprietors, privately held companies, partnership firms, self-employed individuals, and shopkeepers are all eligible for these loans.
How to Apply for Business Loans?
You can apply for a Business Loan in a variety of ways, including:
- Visit the lender’s official website and apply for the loan online by filling out the form and submitting the required documents.
- Visit the nearest lender’s branch and turn in the loan application form and supporting documentation.
- You can also contact the lender’s customer service and ask for help in applying for a Business loan.
What to Do If Your Application for a Business Loan Is Rejected?
A business still has other ways to obtain the required funding if a standard bank loan is denied. There are other ways to obtain the money you require if your loan application is rejected. Following the denial of your business loan, you should undertake the following.
- Find the reasons why your business loan application was denied:
Several factors can cause a bank to turn down a business loan. Because they have not had enough experience in the business world, new entrepreneurs are frequently turned down for a business loan. Suppose a person don’t have a track record of success in the company. In that case, he/she can boost the chances of approval by pledging collateral to lower the lender’s risk or by applying for a loan through the Business Administration to see if the SBA will guarantee the loan through one of its lender partners.
- Improve the finances by working hard:
You’ll frequently get a letter, or other written notification of your business loan application is denied outlining the reasons. Suppose the lender rejects the application without providing any explanation. In that case, you can get in touch with them to find out why and then utilize the answers to strengthen the financial situation before reapplying.
- Look for alternate lenders:
Alternative lenders are organizations that lack a complete banking license but can provide various financial solutions to smaller companies. These include marketplace lenders, direct online lenders, and private lending.
A short-term loan is one kind of internet lending. This loan has a shorter repayment period than loans with regular terms. Usually, such a period of time is between a few months and a full calendar year.
Peer-to-peer (P2P) lending is another form of alternative lending. The borrower, investor, and partner bank connect online to take advantage of an applicant’s metrics and offer them a loan.
The dos and don’ts of applying for a business loan:
One of the easiest ways to get out of financial trouble is to take out business loans. However, getting your loan approved is not always simple because several considerations cause applicants for personal loans to have their applications denied. Here are some tips that will help pass such an assessment. Therefore, adhering to the dos and don’ts listed below is crucial when getting ready to submit a business loan application.
| Do’s: | Dont’s: |
| Maintain a favourable FOIR (Fixed Obligation to Income Ratio):
When processing a loan application, most banks consider the borrower’s net monthly income. FOIR, which is the fixed monthly liabilities divided by the net monthly income, is used to evaluate this metric. The FOIR needs to be between 40 and 50% to be approved for the business loan. It is better to choose a longer loan length since this will lower your potential EMI for the loan, eventually raising your FOIR scores. |
Don’t forget your application data: No matter how unimportant the information may be, it is always crucial to not conceal or distort any personal information. Most banks employ third-party organizations to verify the facts on business loan applications. Despite the possibility that your CIBIL score will make you qualified for a loan, the application is only accepted after a thorough review. |
| Ensure on-time repayments: No lender wants a business loan applicant who has a history of defaulting on payments. Therefore, keeping up your track record by paying your current credit card bills and, if applicable, loan EMIs on schedule is crucial. | Avoid taking out numerous loans to pay off the previous ones: Avoid taking out numerous loans to pay off the previous ones. Such a move could land you in a financial trap and eventually have a negative impact on your credit score. |
| Lower credit utilization ratio: Maintaining a credit utilization ratio under 30% is another factor that must be adhered to diligently. This proportion represents your whole credit card limit as a whole. The ideal credit limit, according to the majority of financial organizations, is 30%. Anything above that indicates credit lust and lowers your credit score. | Avoid making frequent credit inquiries:
Since credit card inquiries and direct loan inquiries are both regarded as hard inquiries, they could affect your credit score. Online inquiries, however, are not viewed similarly and have no bearing on the viability of your proposed loan. |
| Clear the debts: Lenders verify the loans that a company has already obtained. Any pending business loans must be paid off in order to improve the debt-to-income ratio and borrowing capacity. | Inadequate collateral: A business loan can be obtained through both secured and unsecured means. You can apply for a loan based on your needs and the lender’s policies. If the loan amount is higher and you require the loan for a longer period of time, you may be required to submit collateral to the bank for a business loan. |
| Use a smart tax strategy: A business can boost total revenue and lessen its overall tax burden by claiming a tax exemption. To ensure effective tax planning and represent corporate prosperity in tax return income, firms may want to consider hiring an expert. | Lack of a Clear Purpose: The business must answer questions such as why a loan is required, whether it will be used to buy necessary equipment, whether it is launching a new product, whether it is remodelling the office, etc. Businesses that are unclear about the loan’s purpose are less likely to be successful in getting one. |
It doesn’t necessarily follow that you won’t get funding in the future if your application for a business loan was turned down the first time. Ask the lending firm you applied with if they can offer you any advice on what to do next by getting in touch with them.
You can focus on enhancing your company and reapplying if you can figure out why your business loan application was rejected. Until you receive a lender’s permission, try to acquire financial assistance from family and friends.
FAQs:
1. Does the denial of a Business loan impact credit score?
The credit score will suffer once the loan is denied, which will make it harder for anyone to secure a loan in the future.
2. What reasons for Business loan rejection are acceptable?
There are many valid reasons to deny a business loan, such as a low credit score, unstable employment, low income, unpaid bills, a high EMI/NMI ratio, etc.
3. What should one do if their Business loan application is rejected?
Do not apply for another loan immediately if one lender rejects your application. It is wise to wait between three and six months before comparing loan offers that fit your eligibility requirements and submitting an application for the one with the best possibility of being approved.
4. After getting rejected for a Business loan, how long should a person wait before applying again?
A person should ideally wait 3 to 6 months after the loan application is denied before reapplying. He/She may evaluate different loans and use the “Chances of Approval” function to find out which lender will accept the loan.
5. What impact does a business loan have on taxes?
Any interest charged on loan for a business is not subject to taxation. This is so that the interest paid can be classified as a company expense rather than revenue. You may be eligible for business loan tax benefits on excise and other costs if you register as an MSME. The principal sum, however, is not tax-deductible.
6. How much money can a person borrow in total with a business loan?
Depending on the credit score, the person may be able to borrow up to 75 lakhs and even more.
7. Is the interest rate floating or fixed?
For business loans, the interest rate is fixed.
8. How much is EMI required to be paid in a business loan?
The size of the loan determines the EMI. UsetheBusiness Loan EMI Calculator to determine the precise payment amount.
9. How long can one hold a business account to qualify for a loan?
If a person owns a sole proprietorship, they can conduct business out of a personal checking account. But they need a business account if you’re a corporation or limited liability firm (LLC).
For a loan, a company bank account is not necessary. The business must be profitable for three consecutive fiscal years to qualify for a business loan.
10. Can a business loan be obtained without any security?
Yes, anyone can apply for a business loan without providing any security or collateral.
