23 May 2017

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Why Financiers Reject Small Business Loan Applications

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Getting a loan sanctioned for your small business from a bank or a non-banking financial company is not an easy task. You will be required to complete a number of formalities, submit copies of documents, and reply to the questions put to you about your firm’s operations.

Even after providing all this information, it is unlikely that you will get a quick decision on your loan application. All financial institutions have elaborate credit approval processes that can involve several departments and take weeks to complete.

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It can be very disappointing to have your loan proposal rejected after going through this entire exercise. You have the option of starting all over again with a new lender or resubmitting your proposal after carrying out the required modifications or arranging for the missing documents.

You would save a great deal of time and effort by ensuring that your initial application addresses all the possible requirements that the financial institution could have.

Here are some of the points that you should consider:

Familiarise Yourself With the Lender’s Requirements

While it is true that each provider of finance has its own set of norms, there are some basic criteria that every borrower has to fulfil.

If you are approaching a bank or other lender for a term loan to buy machinery, do not expect that the entire cost of acquisition will be financed. In normal circumstances, you should expect to bear at least 25% of the price of the asset.

Many borrowers reason that if they are creditworthy for 75% of the cost of an asset, why can’t they be considered for the entire 100%? But a lender does not see it that way. They want you to invest your own funds so that you have a stake in the new equipment.

Your willingness to make a substantial contribution provides them with an assurance that you will not default on the loan and risk having the asset taken away from you.

Is Your Business Growing?

Your loan application has a greater chance of being rejected if your company registers declining sales volumes. Most firms have to deal with rising employee and production costs. A reduction in the total volume of business year after year will lead the lender to the conclusion that you will soon be making losses and reach a stage where you will be unable to service your debt obligations.

Of course, there could be a reason that your sales are decreasing. You could have discontinued a particular line of business that provided a high turnover, but resulted in a negative margin.

You should be in a position to provide a satisfactory explanation to the lender. Otherwise, be prepared for a negative decision on your loan proposal.

CIBIL Report

Your company credit report from TransUnion CIBIL Ltd can play an important role in the lender’s decision-making process.

It is vital that you know what a CIBIL company credit report (CCR) is and how it works.

A number of lending institutions in the country submit data about your company to CIBIL on a regular basis. This data is collected by CIBIL and a report is prepared in a certain format for each borrower.

CIBIL’s membership exceeds 2,400 and consists of banks, financial institutions, non-banking financial companies and housing finance companies so it is probable that most of the loans that you have taken will find a place in CIBIL’s database.

When you apply for a loan, the lender will ask for your CCR from CIBIL. The CCR will contain details about your company, the credit facilities that you have taken, and the credit facilities that you have guaranteed.

Your repayment record, the legal cases filed against you for recovery, and your current balance payable to lenders will also appear in the CCR. Even the enquiries for loans that you have made with CIBIL members in the last 24 months will appear in the CCR.

SME borrowers can face rejection based on this report. If your CCR contains erroneous data, it is essential that you get it rectified. The credit information company has an established procedure for correcting inaccuracies in the CCR.

Documentation

At the time you make your loan application, it is a good idea to keep copies of all your documents ready. Some of the key documents are:

  • Your annual audited accounts for the last three years
  • Income tax returns of your company and the promoters
  • Details about loans taken from other banks and financial institutions, including copies of the sanction letters
  • Your bank statements for the last six months
  • Your company’s memorandum and articles of association or your partnership deed

You would probably also have several other documents that prove your company’s creditworthiness. Keep all these handy so that you can produce them to the lender when they are required.

Getting a Loan Approved Can Be Difficult

When a lender advances money to your firm, there is always some risk involved. Even if you have the best of intentions, you may find yourself in a position where you cannot pay. Consequently, the lender will have to enter into expensive litigation and possibly write off the amount advanced to you.

Financial institutions are aware of these issues. Their experience tells them that a certain percentage of borrowers will invariably become defaulters. A lender’s entire credit appraisal process is geared towards minimising this risk.

As a borrower, you should anticipate the queries that will be raised and be prepared with your answers. If you can convince the lender that the money advanced to you will be repaid on the committed dates, you stand a good chance of getting your loan sanctioned.

Last Updated ( Sunday, 22 January 2017 15:13 )  



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