MSME Loan Application Rejected? Here's What You Can Do

For Micro, Small and Medium Enterprises (MSMEs), especially those at an early stage looking for ways to enhance their businesses, access to capital can be identified as one of the most challenging aspects. The inability to obtain the required capital needed can stagnate developments and as well limit possible opportunities for growth. Financial assistance such as MSME loans is a significant provision as far as entrepreneurs are concerned, as these loans enable entrepreneurs to put in money for developmental technologies, scaling up their businesses, and entering markets which were previously not accessible. However, the application process for an MSME loan can be prone to challenges, whereby rejection of applications is the most prevalent and discouraging variant. The application, sorrow, and agitation for the denied credit facility are intolerable for the businesspersons’ parents or husbands, causing some regress and lateness up to development of the business.

It is especially significant for beginning business persons resolving to borrow annuals on how to deal with the possible and often actual rejection of an MSME loan application. The persons strive to overcome these costs and borrow the money that enables them to realize their business. MSME loans are paramount for many small business owners, and in this blog post, we will be seeking to identify the most common reasons business owners face rejection of their MSME loans and also advise on what business owners should do to increase their chances of accessing the funding required to propel their businesses forward.

Understanding Why MSME Loan Applications Get Rejected

Before providing answers to this apparent puzzle, it is important to analyze first why MSME loans are often declined with great frequency. Some of the most common ones embrace the following:

Poor Credit History: In judging a borrower’s creditworthiness, factors such as credit score, repayment history, and the debt-to-income ratio are considered. A negative credit profile, especially one that exhibits late payments, defaults or even bankruptcy, may lower your chances of getting an MSME loan greatly.
Insufficient Collateral: Most of the lenders demand for a collateral to be offered as guarantee against the loan given. If you do not have sufficient collateral to offer or the value of your asset is still below the one requested by the lender, your application for a loan could be turned down.
Incomplete Documentation: Applications for loans with missing support documents tend to be delayed or turned down altogether. Many documents, including financial statements and some business plans, tax receipts, ownership evidence and others are needed by the lenders in order to qualify for MSME loans.
High Debt-to-Income Ratio: The lenders also assess how much you can take and how long by looking at the debt service coverage ratio before they sign the loan. This means that, at a critical level and seek to avoid over-leverage for any high-risk projects, the equity/debt ratio should be kept high. In this case, therefore, the lender is likely to view you as someone who may not be able to service the loan repayments), posing a risk on the part of the lender.
Unsatisfactory Business Performance: Lenders screen and research the prospects for the growth and the profitability of the business before coming up with the decision to finance the MSME. If your enterprise has shown poor sales, falling earnings, or erratic cash flow, it is likely that the lenders will see such an enterprise as too risky to lend money to.

Steps to Take If Your MSME Loan Application Is Rejected

Did you encounter a situation where your MSME loan application was turned down? Do not worry. There are some pragmatic measures that you can implement to increase the possibility of getting finances to support your enterprise as outlined below:

Identify the Reason for Rejection: The first step, however, is to determine what led to the denial of your MSME loan application by the lender. Look at the response given by the lender, or if one was not given, you can even call the lender to obtain information on the exact reasons for the denial. This will allow you to rectify any flaws, and enhance your future loan application.
Review Your Credit Report: Order a current credit report from any of the credit report agencies, and check it for mistakes and missing information. Dispute any errors and work on improving your credit score by paying bills on time, reducing debt and keeping credit card utilization low.
Strengthen Your Business Plan: In order to look for funding for your business, you’d also need a proper business plan. Go through your current document and improve on the structure so as to include the plans that you have in regard to your business, your market, the edge that you have over your competitors, and your finances. Emphasize on how you foresee growth and in what ways the loan will be beneficial for your business.
Build Collateral or Find Alternatives: In the case the loan application is denied on the basis that there was no security offered, there is the need to either raise security or other forms of collateral and acceptability. This may mean using some of your own assets, getting a cosigner or guarantor or going for loans from lenders who have government protection.
Address Documentation Issues: Prior to making another application for an MSME loan, one should ensure that all relevant documents have been properly completed and are accurate and current. Review, in particular, financial statements, income tax returns, permits, licenses, and all other relevant attachable documents for compliance with the applicable guidelines put across by the lender.
Seek Assistance from Financial Advisors: It is recommended to look for the help of financial advisors, consultants, and/or business coaches who can assist the applicant with the loan application process. They will help you spot the flaws in the application, make an action plan to fix them and help with funding for your business.
Explore Alternative Lenders: In the event that you are denied a loan by larger banks or similar institutions, turn to other lending avenues, such as internet lenders, peer-to-peer (P2P) lending, or community development financial institutions (CDFI). Such lenders whose lending criteria may not be strict are ready to take up risks that other banking institutions have shunned.
Improve Your Financial Position: It is important and necessary, therefore, to work on these aspects which directly or indirectly affect the financial health and the performance of the business. Pursue growing sales, cutting costs, managing cash more efficiently, and finding ways to raise net income. This is likely to increase lenders' interest in your company with regards to availing them funding and even in future, with regards to any other funding you may want to secure.

Conclusion

Withdrawing an application for an MSME loan may seem like an insurmountable challenge but its high time narrative shifts to be positive. One needs to introspect on what caused the disappointment and work on the same to ensure success in getting funds for the business this time. This could entail measures such as improving existing credit rating, beefing up the business plan, or seeking alternative sources of funds. Many times persistence and resilience just like any other qualities, are indispensable in the face of challenges, in the quest to achieve one’s business goals.

As they say, ‘learning never stops,’ welcome the learning from your victories and failures; rethink your tactics; and sharpen your targets in this expedition of search for this ultimate potion called financing, be it at Chintamani Finlease Ltd. or at any other financier. It is only by constantly pursuing your objective and adjusting the means to achieve it that you stand a favourable chance of accessing that financing which will enhance the growth and success of your MSME.

If you have any further questions, please don't hesitate to contact us:

216, Ansal Vikas Deep Building, Laxmi Nagar District Centre,

Near Nirman Vihar Metro Station, Delhi, 110092.

Phone: (+91) 9212132955

Email: info@chintamanifinlease.com