Most Common Reasons Your Loan Application May Be Rejected

It can be quite devastating for a business owner to experience a loan rejection when trying to secure adequate funds to invest in their business.

Ideally, business fruition thrives upon access to investment opportunities, as well as readily-available cash. For a number of small and medium enterprises (SMEs), there is a tenacious dependence on banks and other financial institutions for business loans. It is, however, noteworthy to mention that there is a conscious divergence from traditional institutions to financial technology platforms.

That’s right. Other than banks, a new wave of lending platforms are sweeping the industry.

It is relatively easy to apply for a loan in any of the commercial banks in Nigeria, as well as other lending institutions.

However, the success of your loan application may not prove automatic as this depends on a number of factors. A loan application can be denied for various reasons, and we walk you through these so that you can eliminate them to increase your chances of getting a loan.

Most Common Reasons Your Loan Application May Be Rejected?

Some of the most common reasons include:

1. Bad Credit History Leading to Loan Rejection

Credit history? What does that even mean? Credit history is a report of all the previous loans an applicant has taken in the past. It also takes into account; an analysis of how the loan was repaid. Now, one of the foremost things a lender does is to make reference to your credit history. Undergoing this task provides the lender with information on the number of loans you have before they proceed with issuing another. 

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This concept might appear strange because a number of Nigerians may not be familiar with the strategy – especially first-timers. It is noteworthy to mention that the credit score plays a significant role in the approval of your application. Ideally, when a loan is declined without reason, it is advised that you check your credit history to be sure that you do not have any defaulted loans.

Awareness of your credit score prior to applying for a loan will inform you if you have poor, or no credit at all. If so, you can be certain that your loan application will be denied because you are too much of a risk.

2. Limited or insufficient collateral

Lenders as banks or financial technology companies are typically not willing to risk lending money to businesses without some sort of reimbursement. Should you decide to loan from a bank, there is every tendency to request a physical property or an equivalent that they can hold on to if a loan is not repaid. 

What should you do in this light? You should create a collateral document that lists everything you can put up as collateral. You can include both business and personal assets since the former may not have the equipment to offer as collateral. Following this, you may have to offer your home or car as collateral.

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3. Loan Rejection Due To Over-Indebtedness

An applicant’s salary, account balance or statement of account do not automatically justify the approval of a loan. Rejection or denial of loan might be due to outstanding loans on the part of the applicant. That’s right: A lender is able to ascertain when an applicant has a number of loans running concurrently. This is a risk-management decision for the lender and they may not be willing to take chances. Actually, it’s a no-no. 

4. Low Income/Profits

Like we have established earlier, lending platforms are in the business of giving out loans such that they can make returns for themselves. Judging by your application, it is possible to discover that your business may not possess the potential to repay them. In this light, an application may be denied. This, however, is not to encourage the adoption of pseudo proposals for your business. No, you do not want to try that.

The simple message is: If you apply for loans that are considered too large for you or your business’ capacity, the proposal may be declined.

5. Flimsy Business Plan or Proposal

Investors will not probably consider your loan application if you present a shallow business proposition. To ensure the approval of your loan sequel to submission, here is a simple rule of thumb: Do justice to the thoroughness and explicitness of your business plan. This paints the picture to your prospective investors that you have conducted research, or that you know your target customers. What’s more, is that it demonstrates you have a clear mission statement with goals in mind, and contains a calculated estimate of sales and profit projections.

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The report further, suggested that asides from your plan, ensure you have prepared your resume, personal background, financial statements, bank statements, income tax returns, and legal documents such as articles of incorporation.

Conclusion

All of these reasons may not be clear to an applicant at the point of rejection because these were not criteria that they expected. However, if they are important to lenders when ascertaining whether or not to issue a loan, a borrower should also put the lenders into consideration prior to applying for a loan.

It is imperative that you do your homework when applying for a loan. Failure to use accurate information about yourself while applying on platforms like Branch Loan can also lead to rejection. Keeping tabs with trends is also an added advantage to keep you abreast of recent developments.

If you discover at any point, that there might be complications, you might as well postpone your application until a later date. Alternatively, you can seek other lending platforms.

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