Rohit Arora.

The author is Co-founder & CEO, Biz2Credit

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Finding Capital: Where To Look If Banks Reject Your Small Business Loan Request

Non-banking lenders have re-emerged as a viable source of capital for small business owners, including women-owned businesses, as they typically tend to focus less on credit scores, and more on the financial health of the borrower looking for funding.

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Access to formal finance is a key constraint for the growth of small businesses across all economies - a problem that has been further accentuated by the COVID-19 pandemic. Even as we navigate to the new normal, small business loan approval rates for banks are still half what they used to be pre-COVID. Studies have shown that for MSMEs across the globe, access to finance is the most significant challenge to their growth. When you look at the Indian scenario, MSMEs form about 99% of all the enterprises, that is about 63 million MSMEs across various industries and geographic locations. While adequate financing for MSMEs has been identified as a priority for India's economic goals over the years, access to finance remains a challenge, despite improvement in financial structures.

Micro and small businesses currently face a huge funding gap as they generally have a more difficult time obtaining credit from formal financial institutions such as banks. This is mostly due to information asymmetry as well as lack of previous credit history and formal documentation, which further leads to the unwillingness of lenders to offer financing options to these borrowers. More often than not, even if they manage to obtain finances, approval times are quite high and generally require hard collaterals such as movable property, etc. While the pandemic of course impacted industries of all sizes, SMEs have been most vulnerable. The credit growth to micro and small industries has decelerated from about 1.7% a year ago to 0.5% in March 2021, according to RBI's data. Despite the fact, that there is assistance, being provided via multiple central and state schemes, availing credit from banks still remains a major cause of concern for MSMEs, as the rate of bank loan rejection remains quite high.

As big banks remain comparatively conservative in doling out small business loans, smaller banks and other lenders get opportunities to gain market share and provide relief to small businesses. Non-banking lenders have re-emerged as a viable source of capital for small business owners, including women-owned businesses, as they typically tend to focus less on credit scores, and more on the financial health of the borrower looking for funding.

Alternative lenders are offering customers business loans today, that are tailored to meet the specific needs of a new business or start-up. Offering your business, the opportunity to scale and giving it the competitive edge that is necessary to succeed in today's world, alternative financing is the best way ahead when your loan application has been rejected by your bank. In fact, alternative financing might turn to be a more lucrative deal for you in the following ways:

· Faster Loan Processing and Disbursal: Faster processing means that you will get credit for your business quicker, allowing you to explore new opportunities as they come your way. Receiving a timely business loan, can expand your marketing potential, amp up your operations and increase your profit margins eventually.

· No (or minimal) Collateral: Since these business loans are generally unsecured, you are placed at any risk of losing valuable assets or giving collateral, such as companies stock or investment. Hence, a business loan from an NBFC lets you preserve your ownership while also providing with the funds needed to grow your enterprise.

· Streamlining Your Cashflow: You can increase your window of opportunity by providing both capital as well as time to streamline your cash flow and enter the profitable territory. Business loans from digital lending institutions can help you in striking a balance between your business fund and companies capital fund by providing an investment that can be repaid in instalments.

· Improve Your Credit Score: A business loan from an NBFC is one of the best ways to improve your business credit score as the loans are reported to all credit bureaus. This becomes extremely beneficial for companies that have witnessed a dip in credit scores due to volatile market conditions.

When financial institutions become too selective and cautious in their decision-making for small businesses, significant inefficiencies in the system arise. Alternative lendingcan revitalise MSME financing using digital tools and cash flow-based lending. Hence, for enterprises whose business loan applications have been rejected by banks, NBFCs are a great way to access capital. The key here, lies in not being pigeonholed into reaching out to only a single type of lender, especially if the approval rates are low. It is best that you conduct your research and look for the best opportunities for funding that you can find.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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