Challenges Borrowers Face while Taking a Business Loan

Launching a business is a tough journey in any day and age. Both established and budding entrepreneurs may encounter several hurdles when applying for business loans. Unfortunately, many promising small businesses succumb to such financial challenges and fail to reach their initial potential. As such, it is essential to know more about these hurdles so that you can prepare for them better.

Limited cash flow

Understanding and managing cash flow is crucial for securing business loans. Lenders prioritize a healthy cash flow as it reflects your ability to repay. Regularly assess your cash flow, aiming for a ratio above 1. A ratio of 1.35 is preferable, showing a financial buffer. Calculate your debt service coverage ratio by dividing net operating income by annual debt to determine a suitable loan payment. This proactive approach enhances your chances of loan approval and financial stability. 

Lengthy Procedure

It would help if you had quick cash to boost your business, but sometimes the loan process can be slow and tedious. You apply and give them all your papers for a meticulous scrutiny of your business details. The lenders review your details with a fine-tooth comb, asking a hundred questions and making you sign countless papers. This arduous journey often hampers immediate expansion plans, impacting revenue goals. 

Also Read: Common Small Business Financing Terms

 Poor Credit History

A poor credit history can be a roadblock to securing a business loan. Lenders use credit reports to assess your reliability, and a history of missed payments can lead to rejection. If your credit score is below 700, work on improving it by checking for and correcting errors. Strengthen your personal credit score, reduce debt, and ensure accurate credit reports before applying for a business loan. A solid financial foundation increases your chances of securing a favourable loan with a manageable down payment.  

Insufficient Collateral

Securing a business loan in India can be tough for small and medium-sized businesses lacking sufficient collateral. Many modern service-based businesses lack tangible assets, making it challenging to meet collateral requirements set by lenders. Despite efforts from RBI and SIDBI to facilitate enterprise finance, lenders persist in their demand for traditional collateral, hindering businesses in need of credit. This becomes a significant hurdle for smaller ventures. They struggle to fulfil banks' collateral requirements, limiting their ability to expand and thrive. 

Check Out: How Can Small Businesses Deal With Emergencies

Requirement of Personal Guarantees

Business loan approval often hinges on a personal guarantee from the owner, making them personally liable for repayments. Without it, the loan may face rejection or higher interest rates. This commitment means the owner is responsible if the company can't make payments. Some owners hesitate due to potential financial impact, as sizable loans may pose risks to personal finances. Balancing business needs and personal commitments becomes a crucial factor in navigating the loan approval process in India. 

Lack of Technology

The slow pace of business loan approvals in India is often linked to outdated processes and a lack of technology. While online platforms scrutinise credit history for quick approvals, traditional banks rely on time-consuming methods like personal visits and extensive paperwork. The absence of efficient technology in some niches of traditional banking proves to be a challenge for borrowers seeking prompt loan approval. Embracing modern technology could streamline the system, making business loans more accessible and quicker for countrywide entrepreneurs. 

Lack of a Solid Business Plan

A well-thought-out business plan can significantly influence your loan approval chances. Lenders prefer businesses with solid plans outlining company details, market strategies, financial projections, etc. Applying without a comprehensive plan can hinder approval. Even small businesses benefit from a formal business plan that contains their financial information and ambitions. Seek expert advice if needed but ensure your plan is persuasive to lenders. 

Short Operating History

A short operating history can impact business loan approval. Lenders prefer businesses with proven performance as they feel reassured that such a firm can stand by its loan repayment commitments. New companies face a hurdle for loan approval as they often lack this history. Entrepreneurs seeking startup funds may find Non-Banking Financial Companies (NBFCs) more flexible than traditional banks as they often have less stringent requirements. This offers a viable option for businesses with limited operating history to secure the necessary funds for their ventures. 

Different Criteria for Various Businesses

In India, business loan approvals vary due to different criteria set by banks for various businesses. For example, some lenders might only offer loans to companies with a turnover exceeding ₹12 Lakhs, while others might mandate a business vintage of over 3 years. Business owners face challenges due to this lack of standardised rules. A consistent set of criteria across banks could simplify the process, allowing owners to target specific lenders aligned with their eligibility and save time. 

Ensure smooth sailing for your business loan process by preparing for these challenges beforehand. For a hassle-free process, meet your company's capital needs with a Business Loan from Bajaj Markets! Secure a high loan amount of up to ₹50 Lakhs at interest rates starting from 12% p.a. only. Apply today and benefit from a fast and secure online application process, quick approval and disbursal, and more. Build a robust business foundation with effective tactics and thrive in the entrepreneurial landscape!