SME owners commonly use external funding to buy equipment, acquire inventory, recruit staff, rent office space, and cover various other business expenses. However, small companies often find it challenging to get a Business Loan.
A loan rejection might sound depressing, but there can be many reasons for it. Identifying these challenges in time and addressing the concerns can help borrowers get loan approval without hassle. Here we will discuss a few common hurdles business owners face while applying for an SME loan and learn how to overcome them.
- No Business Vintage
Getting the required funding is one of the most challenging hurdles many small businesses face. Many loan companies prefer SMEs that are at least three years old in the industry. It helps the lender assess if the owners can manage their firm successfully and identify their growth potential. This is why finding an NBFC with a minimal business vintage requirement would suit a small company. It funds the firm’s development at different levels as long as the owners have a solid business plan and know how to execute it.
- Limited Cash Flow
As far as assessing the business’s health is concerned, cash flow is one of the first things that lending institutions check. Consequently, they look at the firm’s annual turnover to determine whether they can afford a loan. Using a Business Loan calculator to determine the loan amount is a robust preventative strategy to plan the loan application efficiently. It enables cash flow optimization before approaching a potential lender.
Dividing the net income by total financial obligations is the right way to obtain the debt-to-income ratio, based on which one can decide how much to borrow. If the income is sufficiently higher than the monthly commitments, the DTI ratio would be in control, and they can handle more loans conveniently. That convinces lending institutions to sanction a decent loan amount at reasonable interest rates.
- Missing Documents
Applying for a Business Loan requires some necessary documents for verification. Each document helps the lending institutions determine the risk level in lending money to an organization. So, set aside some time to review the loan documentation requirements and double-check the information before applying.
Loan seekers must produce some relevant documents, like identity proof, address proof, financial records, proof of ownership, etc. By keeping these documents in order, aspiring borrowers can overcome the hurdles that might stop them from qualifying for the required funding.
- Bad Credit
When applying for an SME loan, the business credit score is one of the most crucial parameters lenders consider. Those with a credit score of 700+ get easier loan approvals for higher loan amounts at reasonable interest rates.
The applicant’s credit information presents to lenders how they have handled credit in the past and if they can pay their EMIs on time for future loans. Therefore, checking the credit score before filing a Business Loan application is a good idea. Ensure it is in good shape. If not, create a plan to raise the credit score to get a better loan offer.
- No Collateral
Many NBFCs demand valid collateral to secure the deal and provide the required cash. A lack of valuable collateral can prevent a small or medium-sized business from acquiring the finance it needs. That is not a severe problem for big-scale companies and giant corporations, but smaller firms may face it as an insurmountable hurdle.
To overcome this, a firm must seek an unsecured funding source such as a Business Loan. It is a collateral-free loan that lenders sanction based on the borrower’s credit history and business performance. The loan amounts can be up to Rs 50 lakhs, and these loans have no restrictions on their end usage, allowing SME owners to use them for any business-related purpose they want.
Business Loans are no longer challenging to obtain because of the streamlined application processes many technologically-advanced NBFCs support these days. Borrowers may use it to sustain, grow, or expand their business and repay it conveniently through affordable EMIs.
However, maintaining a good credit score, reducing the DTI ratio, and showing a considerable annual turnover can help overcome these hurdles efficiently and get the required Business Loan at the right time.
About the Author
Amaira Sharma is finance expert and former business growth strategist who has more than 8+ years experience in the industry, now she helps others to get better financial stability and standards. She loves to write useful tips on personal finance and businesses.
