4 Reasons MSMEs Face Rejection for Business Loans and the Role of NBFCs


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Acquiring a loan at the right time plays a significant role in the journey of any small business. It ensures the smooth running of operations, supports the prospect of business expansion, and enables the business owner to make the most of available market opportunities. A loan paves the way for a small business to achieve its objectives and thrive in a highly competitive environment.

However, just like any other process, business loan approval depends on a set of pre-defined parameters, which, if unmet, can lead to rejections. The best way to avoid this is to do ample research about all the requirements before moving forward with the process.

4 Reasons MSMEs Face Rejection for Business Loans and the Role of NBFCs

Here is a detailed view of some of the primary reasons why MSMEs face rejection for business loans by traditional banks:

– Lack of Collateral

The presence of tangible security is one of the foremost ways for traditional banks to secure their lending, particularly if you own any land, home, or other real estate property. An assessment of that one asset that you are willing to leverage as collateral is essential before going ahead with loan issuance.

– Improper paperwork

A large number of small business loan applications necessitate the submission of KYC and income verification documents related to you and your business. Usually, it is important to present your personal KYC documents and those of your co-applicant or business partners, as well as business verification documents, to ensure a successful loan sanction. While business registration documents such as Business PAN can’t be substituted, many lenders may accept other documents such as a Passport or Voter’s ID as one of your personal KYC documents. The absence of even one of the documents can lead to rejection; therefore, it is vital to keep everything ready beforehand.

– Risky Industry

Specific traditional lenders classify some business sectors as ‘risky’ due to the nature of the product or a noticeable high rate of loan default. Often, the sector focus can shift as macroeconomic factors can affect performance, for e.g. the auto components industry is likely to show poorer returns if the auto market is showing reduced consumer demand. You might face difficulties acquiring a loan if your enterprise falls into a risky category. It is best to show that you have the ability to diversify your product and customer base so that you can show an alternative way for your business to gather funds. If your business is included, you can instead approach a lender who specialises in your industry to improve your chances.

– Business Vintage and Experience

Traditional creditors take a look at your past record before furthering the loan application process. It is important to maintain a good credit score by paying your loans on time. Small business entrepreneurs with relatively less market experience might find it hard to get a business loan from traditional sources. Looking for alternate funding mediums might be the best decision for small business owners to get a loan regardless of their time in the market.

Non-banking Financial Company (NBFC): Gaining Currency in the MSME Sector

While some banks today are lending directly to micro, small and medium enterprises (MSMEs), NBFCs are gaining momentum by bridging the gap NBFCs have been seen as one of the primary credit providers to MSMEs, especially in the micro and the small category, because they provide flexible loan arrangements.

There has been a transformation in the partnership models between larger NBFCs and banks, enabling NBFCs to successfully aggregate and distribute risk. This has come as a consequence of NBFCs solidifying their hold beyond tier 1 cities with their strong market knowledge and credit underwriting tailored for MSMEs.

Acquiring a business loan from an NBFC can be one of the best ways for MSME to further the growth of their business. NBFC lenders usually have flexible terms and conditions compared to banks, offer a wider variety of loan options, and offer a faster loan sanctioning process.

Financial institutions like Kinara Capital offer fast loans to MSME. Their 100% digital loan application process can help you check your loan eligibility in just 1 minute, without any hassle. Once the eligibility is cleared, you can complete the application online or have a Kinara officer get in touch with you and walk you through the entire process. You can download the new myKinara app to check your eligibility within a minute. Once the eligibility is cleared, the application allows you to complete your KYC and income verification and receive a loan decision with details of the sanctioned loan amount. Kinara Capital’s flexible documentation process ensures that you can provide alternatives to KYC documentation for yourself and your business partners. You can easily acquire a business loan disbursed in as little as 24 hours.

So, make sure you are well-prepped before acquiring a loan for your MSME and choose NBFCs registered with the RBI for your security.


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