Problems Faced by SMEs in Loan Approval if Their Financial Accounts Are Not Maintained Properly


Small businesses are subjected to endless deterrents every day, ranging from problems with hiring to maintaining product relevance. Financial challenges, however, tend to loom the largest.

Business finances are a complex, volatile entity, that serves as the fuel for any operations. They are a critical factor to help determine whether your business would be approved for a loan or not.

A decently maintained financial account can keep a business afloat, while negligence most certainly means the downfall of the entire system.

Problems Faced by SMEs in Loan Approval

Improving your business’ financial conditions revolves around specific parameters that you need to keep track of to keep decent financial account health.

SMEs often face issues while getting their loan sanctioned mostly due to poorly maintained financial accounts.

Here we shall discuss some of the financial challenges that small businesses encounter every year while applying for a loan with inadequate financial accounts –

  1. Lack of Modern Technologies

Most loan lending institutions take into account the monthly debit and credit card sales of a business to sanction the loan application.

The Point-of-Sale (POS) system facilitates the borrowers to avail business loans by directing sales through POS machines. However, a lot of SMEs still haven’t implemented online business transactions.

The data provided by RBI (Reserve Bank of India) indicates that online/digital payment modes have been on a decline since some people don’t trust the online payment methods.

Considering this, small business owners still don’t encourage cashless transactions. The financial accounts are not maintained efficiently with the traditional methods of payments.

The lenders need to invest in state-of-the-art financial technologies and promote technology-driven loan products amongst the SME owners.

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  1. Absence of a Decent Credit Score

When it comes down to processing business loan applications, most loan lending institutes monitor the business owner’s personal and business credit score.

A favourable credit score can get you faster loan approval, higher credit limits, a lesser rate of interest, and would reflect in your future applications, facilitating ease of loan sanctioning from various lenders.

A massive chunk of online lending institutions that provide business loans to SMEs often demand an excellent personal credit history and score.

However, many business owners don’t emphasise on the skills to improve the CIBIL score and create a positive credit history.

Your credit score might not meet the standard regulations due to your incompetency to maintain good financial accounts.

This would imply that you have not been repaying your debt timely and are not well-experienced in handling credit.

The SME owners need to work on enhancing his CIBIL score and building credit history so that the loan borrower can access his creditworthiness and facilitate easy loan sanctioning.

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  1. No Standardisation in Project Appraisal

The lending institutions review the risk in lending on copious factors rather than sticking to a specific set of guidelines. Due to this, the eligibility criteria for different loan products vary.

Some loan lenders take into account the business plan and the projects submitted by the borrower to corroborate his overall credibility before finally sanctioning the loan.

Despite so many factors at play, there exist no predefined rules or standards for project appraisal.

This absence of standard eligibility criteria to evaluate the creditworthiness of the borrower only makes it more tedious and challenging to pen down the right application.

  1. Lengthy Appraisal Processes

Many SMEs lack a proper financial account statement to be produced forth the banks and lenders while opting for loans.

This causes them to resort to seeking financial aid from traditional banks or alternative lending institutions at a low rate of interest.

However, the traditional banks set strict credit criteria and demand the submission of elaborate documentation.

To process the business loan request and disburse funds, these banks then require quite some time, leading to severe delays.

Thus, SMEs are hardly able to avail credit on time to fund their working capital needs and regulate cash flow. Many borrowers decide to avail credit from alternative lending institutions to take-the-edge-off of loan disbursement time.

Final Words

The latest financial technology has transformed the way of the governance of the financial institutions in India.

The loan lenders can now conveniently cater to the challenges faced by SMEs in India. They are facilitating a smoother mode of SME financing without any hassle and delay.

Today, lenders, along with borrowers, can better resolve the issues faced by SMEs and act as a helping hand in fueling the growth of the SMEs.

However, the borrowers need to understand that maintaining proper financial account health and a proper finance tracking system is paramount.