4 Red Flags Banks Look for When Going Through Business Loans’ Applications

Business loans are trickier than personal loans. For starters, they are usually bigger in amount. They also tend to have a high risk depending on the nature of the business, credit history etc.

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The following are the top 4 red flags that banks look for when screening business loan applications:

1. Bad Credit or No Credit
   Credit history is the biggest sign of comfort for any lender, whether it’s a traditional bank or an NBFC. So, if a candidate has no credit history at all, or even worse- a history that’s far from comforting, then it could lead to an instant loan rejection. Some signs of a bad history include poor credit score, instance of defaulting, or frequent late payments, etc.
2. Lack of Preparation
   The loan applicant should be able to answer all the important questions pertaining to their business. Some of these include:
   • What problem will the business solve? What makes it different than other businesses in the segment?
   • What’s the plan for marketing and sales?
   • What kind of revenue models does the business plans to use?

   If they don’t have confident or convincing answers to these questions, then also it could raise a red flag.

3. Lack of Collateral
   No matter how strong is the credit profile of the candidate, there is always some risk to every business, especially if it’s new. So, if the loanee fails to repay the loan, the bank needs some collateral to fall back to.
   For instance, if they have a property or some other tangible assets they can offer as collateral, they can get the loan easily. On the other hand, if there is no such collateral, then it may put the bank in a difficult situation.
4. Negative Cash Flow
   If a person needs capital for a business that’s already up and running, then it’s really important that it’s cash flow positive. If it’s cash flow negative, there is no way a bank would want to risk their money with them. In most, cases, it’s an instant rejection.