Top 5 Reasons Why Business Loan Applications Get Rejected in 2025

Shobit, a 28-year-old entrepreneur from Indore, dreamed of taking his homemade cookie business to the next level. With monthly sales of ₹2,50,000 and 3 loyal employees, he applied for a ₹15,00,000 business loan to buy a commercial oven (₹6,50,000) and open a second outlet (₹8,50,000 setup cost).

After 7 working days of anxious waiting, the bank’s SMS arrived:
 

 "Loan application #BL2025/4179 rejected. Contact the branch for details."

Shobit’s heart sank – his CIBIL score was 687, just 13 points short of the bank’s 700 cutoff, even though he had submitted all 22 required documents.

Like 43% of small business loan applicants in 2025, Shobit now stared at his laptop screen, wondering where things went wrong.

Little did he know, his rejection followed a pattern affecting thousands of young entrepreneurs this year...

(In this blog, we will explore 5 secret reasons banks don’t tell, but reject 72% of loan applications!)

What Is A Business Loan?

A business loan is a financial tool that helps businesses get funds for expansion, working capital needs, or purchasing new equipment. In India, banks and non-banking financial companies (NBFCs) offer different types of business loans tailored to specific business requirements.

Types of Business Loans

1. Term Loan: A fixed loan amount given for a specific period (12 to 60 months). It is used for business expansion, purchasing equipment, or starting a new project.
   
   
2. Working Capital Loan: Helps manage daily business operations like buying inventory or covering short-term cash flow gaps.
   
   
3. Overdraft Facility: Allows businesses to withdraw more than the available balance in their account, with interest charged only on the amount used.
   
   
4. Equipment Financing: A loan for purchasing new machinery or equipment, where the purchased asset acts as collateral.
   
   
5. Government Schemes: The Indian government offers special loan schemes like Mudra Yojana, Stand-Up India, and CGTMSE (Credit Guarantee Fund Scheme for Micro and Small Enterprises) for MSMEs (Micro, Small, and Medium Enterprises) at lower interest rates.

Example:

Karthik, a 25-year-old bakery owner in Bengaluru, has been running his shop for 3 years with an annual turnover of ₹30,00,000. To expand, he applies for a ₹10,00,000 business loan at 12% interest over 3 years. With a credit score of 760, his application is approved. He uses the funds to purchase new equipment and hire staff, boosting his bakery's growth.

Common Reasons For Business Loan Rejection

1. Poor Credit Score – Bank Wale Bole, ‘Aapse Na Ho Payega!’

When applying for a business loan, having a strong credit score is very important. A credit score is a three-digit number that represents your financial credibility. If your credit score is low, lenders may think that your ability to repay the loan is weak, which increases the chances of loan rejection.

Credit Score Range

Importance of Credit Score

Lenders use your credit score to understand your financial history and loan repayment behaviour. A high credit score shows that you have paid your past debts on time, whereas a low credit score indicates late payments or defaults. In India, most lenders consider a credit score of 700 or above as good, while a score below 650 can reduce the chances of loan approval.

Example:

Santosh runs a small electronics shop in Bengaluru. In 2023, he applied for a ₹5,00,000 business loan but was rejected because his credit score was only 580, which is considered low. The bank informed him that his late EMI payments and overuse of his credit card were the main reasons for the low score. Santosh often used 90% of his ₹1,00,000 credit limit and had missed several payments.

After realising the issue, Santosh took corrective steps. He began paying all his bills and EMIs on time and reduced his credit card usage to 25% of the limit. Over the next 12 months, his credit score improved to 720, moving into the 'Good' category. With this improved score, he reapplied for the loan and was approved at a favourable interest rate.

Reasons for a Low Credit Score

• Late Payments: Not paying credit card bills or loan EMIs on time negatively affects your credit score.
  
  
• Defaults: If you fail to pay a loan or credit card bill, your credit score can drop significantly.
  
  
• High Credit Utilisation: Using a large portion of your available credit indicates financial stress and can lower your credit score.
  
  
• Multiple Loan Applications: Applying for many loans in a short time signals financial difficulty, which can negatively impact your credit score.

What are some ways to improve your credit score?

• Pay on Time: Always pay your bills and EMIs on time.
  
  
• Reduce Credit Utilisation: Try to use only 30% or less of your available credit.
  
  
• Check Your Credit Report Regularly: Monitor your credit report and correct any errors.
  
  
• Apply for New Credit Wisely: Apply for new credit cards or loans only when necessary.

A good credit score not only increases your chances of getting a business loan but also helps you secure better interest rates, making it financially beneficial for your business.

2. Weak Business Plan – ‘Na Strategy Tight, Na Future Bright!

When applying for a business loan, having a strong and realistic business plan is very important. A weak or unrealistic business plan signals to lenders that the business owner lacks an understanding of their business model and market, which can make loan approval difficult.

What Should Be Included in a Business Plan?

• Financial Projections: Estimate income and expenses for the next 3-5 years, including sales forecasts, cash flow statements, and profit & loss statements.
  
  
• Market Analysis: Study the target market in detail, analyse competitors, and understand the position of your product or service.
  
   
• Growth Strategy: Plan how to expand the business, attract new customers, and strengthen your position in the market.

Example:

Below is an example of the financial projections for the first year of a startup bakery:

Key Takeaways

• Realistic Projections: Numbers should be realistic; overly optimistic or unrealistic estimates can reduce lenders’ trust.
  
  
• Detailed Analysis: Every estimate should have clear reasoning and supporting data.
  
  
• Regular Review: The business plan should be reviewed regularly and improved when needed.

A strong and realistic business plan not only increases loan approval chances but also helps in the successful operation and growth of the business.

3. Insufficient Cash Flow – ‘Cash Kam, Mushkilein Maximum!’

When applying for a business loan, lenders want to see that your business has enough cash flow to handle loan repayments and other expenses. If your cash flow is not strong and stable, lenders may doubt your ability to repay the loan.

Ways to Improve Cash Flow

1. Increase Revenue: Attract new customers and use better marketing strategies to grow your income.
   
   
2. Control Expenses: Reduce unnecessary spending and monitor expenses carefully.
   
   
3. Optimise Operations: Improve business processes and use new technologies to increase efficiency, which can positively impact cash flow.

Example:

Below is an example of a one-month cash flow for a small manufacturing company:

In this example, the company has a total revenue of ₹5,00,000 and total expenses of ₹4,00,000, resulting in a net cash flow of ₹1,00,000. This positive cash flow shows that the company can manage its expenses and loan repayments efficiently.

Key Takeaways

• Stable Cash Flow is Important: A steady and strong cash flow assures lenders that you can repay the loan on time.
  
  
• Regular Monitoring is Necessary: Analyse cash flow regularly and make improvements when needed.
  
  
• Seek Professional Advice: Consult a financial analyst or a Chartered Accountant (CA) to improve cash flow management.

Remember, strong cash flow not only helps with loan approvals but also improves the overall financial health of your business.

4. Inadequate Documentation – ‘File Adhuri, Approval Ki Doori!’

When applying for a business loan, incomplete or incorrect documentation is one of the main reasons for delays or rejections. Lenders need complete and accurate information to understand your business properly. If documents are missing or incorrect, it raises doubts about your business's credibility and reduces the chances of loan approval.

Required Documents

1. Business Registration Proof: Business registration certificate or GST certificate.
   
   
2. Financial Statements: Audited balance sheets, profit & loss statements, and cash flow statements for the last 2-3 years.
   
   
3. Tax Returns: Personal and business income tax returns for the last 2-3 years.
   
   
4. Bank Statements: Last 6 months' bank statements to show cash flow and financial stability.
   
   
5. Identity & Address Proof: PAN card, Aadhaar card, passport, or driving license.
   
   
6. Business Plan: A detailed business plan explaining fund usage and repayment strategy.

Common Documentation Mistakes & Their Impact

Example:

Tanisha, a 28-year-old boutique owner in Pune, applied for a ₹7,00,000 business loan. She submitted only her balance sheet, omitting profit & loss statements and recent bank statements. The lender couldn't assess her financial health, leading to loan rejection. Tanisha realised the importance of complete documentation and plans to reapply with all necessary papers.

Ways to Improve Documentation

1. Use a Checklist: Make a list of all required documents and ensure they are complete.
2. Seek Professional Help: Consult a financial advisor or accountant to verify document accuracy.
3. Keep Records Updated: Regularly update financial records and tax filings to keep them current.
4. Maintain Consistency: Ensure all documents contain matching and correct information.

Remember, accurate and complete documentation not only increases loan approval chances but also speeds up the application process. So, prepare your documents carefully and review them before submission.

5. High Existing Debt – ‘EMI Zyada, Neend Kam!’

When applying for a business loan, having a high amount of existing debt can lead to loan rejection. The main reason behind this is the Debt-to-Income Ratio (DTI), which shows the percentage of your total income that goes toward debt payments. If this ratio is too high, it signals to lenders that your business may not be able to handle additional debt.

How to Calculate DTI

DTI = (Total Monthly Debt Payments / Total Monthly Income) * 100

Example:

From this table, it is clear that as debt payments increase, DTI also increases. Lenders generally prefer a DTI of 36% or lower. If the ratio is higher, the chances of loan approval decrease.

Ways to Improve DTI

• Reduce Existing Debt: Focus on repaying existing loans as much as possible.
• Increase Income: Growing your business revenue can help improve your DTI ratio.
• Think Before Taking New Loans: Only take new loans when necessary.
• Consult a Financial Advisor: An expert can help you balance your debt and income effectively.

Remember, maintaining a balanced DTI not only increases loan approval chances but also reflects financial stability in your business.

Conclusion

The biggest reason for business loan rejections is poor financial health or incomplete preparation. If your credit score is low, your business plan is weak, your cash flow is insufficient, your documents are incomplete, or your existing debt is high, lenders will hesitate to approve your loan.

To get your loan approved, first, improve your financial discipline – pay EMIs and bills on time, control credit utilisation, and avoid unnecessary loans. Your business plan should be realistic and detailed, with clear financial projections and market analysis.

To improve cash flow, reduce expenses, and focus on increasing revenue. Also, double-check all documents before submitting the loan application to avoid any mistakes.

To manage high existing debt, keep your debt-to-income ratio at 36% or below. If you follow these points, your loan approval chances will increase, and it will be easier to get funds for business growth.

FAQs

1. What is the minimum credit score required for a business loan in India?

Most banks and NBFCs in India prefer a credit score of 700 or above for business loan approvals. A score below 650 may lead to rejection or higher interest rates. 

2. Can a new business with less than 2 years of operation get a loan?

Yes, but it can be challenging. Some lenders offer startup loans, but they may require a strong business plan, collateral, or a guarantor. Government schemes like Mudra Yojana or Stand-Up India can also help new businesses secure funding.

3. Why do lenders reject loans even if the business is profitable?

Profit alone does not guarantee approval. Lenders also check cash flow, existing debt, repayment capacity, and documentation. If cash flow is unstable or the debt-to-income ratio is high, the loan may still get rejected despite profitability.

4. How can I improve my chances of business loan approval?

Focus on maintaining a good credit score, preparing a realistic business plan, ensuring strong cash flow, organising all financial documents, and reducing existing debt. A well-structured loan application with clear repayment plans increases approval odds.

5. What should I do if my business loan gets rejected?

First, ask the lender for the rejection reason. Work on fixing the issue – whether it is improving your credit score, adjusting business projections, or reducing debt. You can also explore alternative lenders, NBFCs, or government-backed loan schemes that may have flexible criteria.

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?