Discover 14 common reasons for loan rejection, learn how to avoid them and avoid asking yourself – ” Why Is My Loan Getting Rejected

Women entrepreneurs are making strides in business, but navigating the business loan process can sometimes be challenging. The good news? More women are applying for loans than ever—a staggering 3.9X increase between FY2019 and FY2024, according to TransUnion CIBIL. If you’ve ever wondered, ‘Why is my loan getting rejected?’ don’t worry; we’re here to help you with the knowledge of the common reasons why loans might be turned down, especially for MSMEs, and share some practical tips to boost your chances of approval.

Apply for a Business Loan

14 Common Reasons for Loan Rejection

#1. Frequent Loan Applications and Credit Enquiries

Applying for multiple loans or making frequent credit enquiries can harm your credit score and increase the chances of loan rejection. Lenders may interpret this behaviour as a sign of financial difficulty, viewing you as a riskier borrower who relies heavily on credit. It’s better to focus on one well-prepared loan application at a time and limit the number of credit enquiries.

Pro Tip: Before applying for a loan, check your credit score and ensure it’s in good shape. If you’ve recently made multiple credit enquiries, give it some time before applying for a new loan to avoid negatively impacting your credit score. This patience can increase your chances of getting a business loan approved.

#2. Missing or Incorrect Documentation

When applying for a business loan, accurate documentation is essential. Any missing or incorrect documents can result in loan application rejection. Make sure to submit documents related to you and your business and ensure they don’t belong to someone else. Double-checking your paperwork before submission can help prevent delays and underwriters rejecting loan applications.

Pro Tip: Create a checklist of required documents and review each one before submitting your application. This simple step can save time and reduce the risk of loan rejection due to missing or incorrect paperwork.

#3. Errors in the Application

Simple errors in your loan application, such as incorrect information or missing data, can lead to loan rejection. It’s important to review your application thoroughly before submission. Consider seeking help from a trusted colleague or friend to ensure your application is error-free.

Pro Tip: You can also join the Loan Open House Session, Monday-Friday, on the Mahila Money app to seek live guidance. The Mahila Success Team is happy to help!

#4. Inadequate Credit Score

If your credit score is low, it may be the main reason why your loan application is declined. Lenders check your credit history to decide if they should loan you money, and a low credit score suggests that you may have had trouble with credit in the past.

Pro Tip: Set reminders to pay your bills on time, even if it’s just the minimum payment. Consistently paying on time is one of the easiest ways to improve your credit score.

#5. Unstable Business History

Lenders are more likely to approve loans for businesses with a stable and proven track record. If your business has experienced financial instability, lenders may view it as a risk. For instance, if your business has been operating for six months but hasn’t generated revenue in the last two months, this could raise concerns. It’s essential to be transparent about any financial challenges and explain the reasons behind them, such as seasonal fluctuations or temporary setbacks. Additionally, if your business is still in the early stages with a limited financial history or if you’re starting a new business, this lack of stability can also lead to loan rejection. Even if modest, demonstrating consistent revenue and a clear plan for overcoming any instability can help build lender confidence in your ability to repay the loan.

Pro Tip: To strengthen your loan application, maintain detailed financial records that show consistent revenue, even modest ones. Be upfront with your lender about past challenges and outline a plan for future stability. If your business is new, consider starting with a smaller loan or alternative funding options to build your creditworthiness over time.

#6. Poor Business Plan

A well-structured and detailed business plan is not just a requirement when applying for a loan, but it also showcases your professionalism and preparedness. Lenders want a clear plan outlining your business goals, strategies, and how the business loan will be used. A vague or poorly developed business plan can lead to loan rejection. So, before you ask yourself- ‘why is my loan getting rejected?’ take the time to create a compelling business plan that showcases your business’s potential.

Pro Tip: Keep your business plan simple and focused. Highlight your unique selling proposition (USP) and clearly explain how the loan will help you achieve your business goals. Use bullet points or a summary to make it easy for lenders to grasp your vision quickly.

#7. Inadequate Cash Flow

Cash flow is the lifeline of any business, and lenders closely examine it to assess your ability to repay a loan. If your cash flow is irregular or insufficient, it can lead to loan rejection. For example, lenders may see this as a red flag if your business doesn’t generate a consistent average monthly profit (AMP) or your account balance frequently dips below a stable level.

Pro Tip: To improve your chances of approval, focus on maintaining a steady cash flow by managing expenses carefully, increasing revenue streams, and ensuring your account has a stable balance. Demonstrating that your business regularly earns enough to cover operational costs and loan repayments can significantly boost your credibility with lenders.

#8. High Fixed Obligations

High fixed obligations indicate that your business has significant costs and debts relative to its income, which can concern lenders. For example, if your business’s turnover isn’t enough to cover your regular expenses like rent, salaries, and loan repayments, or if you have a large outstanding loan from a previous lender, lenders might worry that you won’t be able to manage additional debt, which can be one of the reasons for loan rejection.

Pro Tip: To improve your chances of loan approval, focus on reducing these fixed obligations, such as paying off existing debts or cutting unnecessary expenses, and increase your business’s revenue. For instance, consider negotiating better rates with suppliers or switching to a more affordable office space. Small changes can add up, freeing cash flow and making your business more appealing to lenders.

#9. Penny Drop Failure

A “Penny Drop” is a simple test lenders use to check if your bank account details are correct and active. They deposit a tiny amount of money, like  ₹1 or ₹2, into your account. If this small deposit fails—because the account details are wrong, the account is frozen, or there are other issues—your loan application might be rejected. To avoid this, double-check that you’ve entered the correct bank account information and ensure your account is active and can receive funds.

Pro Tip: Always update your bank account with the correct details and regularly check its status. Before submitting a loan application, make a small transaction to ensure everything is working smoothly and the account is active. This simple step can help avoid any surprises during the verification process.

#10. Not Being Honest About Multiple EMIs

If you have multiple EMIs (Equated Monthly Instalments) and are not upfront about them in your loan application, it could lead to loan rejection. Lenders assess your ability to repay based on your existing financial obligations. Hiding or misrepresenting your financial commitments can damage your credibility. It’s better to be honest about your financial situation to build trust with the lender.

Pro Tip: Have a detailed record of your current EMIs and keep them handy during verification. This transparency shows that you are organized and trustworthy, and it helps the lender understand your accurate financial picture.

#11. Not Asking for Adequate Capital

Sometimes, businesses request a loan amount either too high or too low for their needs. Lenders might reject the application if the amount seems unrealistic or does not match your business plan. It’s important to carefully assess your capital needs and request a loan amount that aligns with your business goals and repayment capacity.

Pro Tip: Create a detailed budget outlining your current expenses and future needs before applying. This will help you determine the required capital and ensure your loan request is realistic and well-supported.

#12. Making Frequent Credit Enquiries

Remember, making lots of credit inquiries can hurt your credit score. Lenders might think you’re desperate for credit or have too much debt, which could lead to getting turned down.

Pro Tip: To avoid unnecessary credit checks, thoroughly research and compare loan options before applying. Limiting the number of credit inquiries and improving your credit before applying for a loan is best.

#13. Your CIBIL Report

Your CIBIL report is a detailed credit history record; lenders use it to evaluate your creditworthiness. This report shows critical information like your payment history, the status of your current loans, the number of loans you’ve taken, and how many loan enquiries you’ve made. If there are negative remarks, such as late payments or a high number of loan enquiries, lenders might see this as a red flag. These factors can indicate potential financial stress, leading to a loan rejection. Regularly checking your CIBIL report and ensuring all the information is accurate can help you identify and correct any issues before applying for a loan. By maintaining a clean and up-to-date credit report, you can improve your chances of loan approval.

Pro Tip: Set a reminder to review your CIBIL report every six months. This will help you catch and address any issues early, keeping your credit profile in good shape and boosting your chances for loan approval.

#14. Industry Risk

Lenders consider specific industries at higher risk, leading to higher chances of loan rejection. Suppose your business operates in a risky sector, and you may need to present more robust financials or seek alternative financing options.

Pro Tip: Highlight any unique advantages or successful strategies in your industry to reassure lenders. Additionally, explore niche funding options or grants specifically designed for your sector.

How to Avoid Loan Rejection

#1. Know Your Business 101 for Loan Approval

It’s your business—you built it, so no one knows it better than you. When lenders call to verify your application, it’s important to speak confidently and provide clear, concise answers. Be prepared with all the necessary details, from financials to your business plan. Avoid having someone else, like a male relative, speak on your behalf, as this can create confusion and raise unnecessary questions. Show the lender you’re in complete control and deeply understand your business.

#2. Prepare Your Documents Thoroughly: Before submitting your application, double-check that all your documents are complete, accurate, and up to date.

#3. Showcase Your Business Plan: Create a compelling business plan outlining your goals, strategies, and how you intend to use the loan. This will help lenders see the potential in your business and build trust.

#4. Maintain a Healthy Credit Score: Regularly monitor your credit score and take steps to improve it by paying off any existing debts and avoiding unnecessary loans or credit inquiries. A good credit score increases your chances of loan approval.

#5. Be Honest About Your Financial Situation: Always provide truthful information about your income, expenses, and any existing debts. Being transparent builds credibility with lenders and can prevent issues during the loan processing stage.

Conclusion

Remember: Loan rejection isn’t personal. It’s often about numbers and risk assessment. By understanding the common reasons for rejection, you can improve your chances of success in the future. So next time you ask yourself, “Why am I being refused a loan?” don’t be discouraged. Use the insights from this article to refine your approach and increase your chances of success in your next loan application.

Do you have any specific questions about loan rejection? Drop them in the comment section below. Until then, let’s continue to #JiyoApneDumPe.