Loan Approval Criteria

What Really Happens Inside a Bank’s Loan Approval Committee? To secure loan approval, companies must undergo stringent assessments of profitability and risk, with well-structured, risk-reduced deals enhancing their chances. 1. The First Hurdle: Banks initially screen loan requests by evaluating -Industry stability -Past banking history for defaults or delays -leadership's financial discipline -The stability of revenue trends and leverage ratios. Loan requests with high leverage, weak cash flow, or compliance issues face likely rejection. 2. The Real Test: Examination of Loan Proposal in three main areas: A. Financial Metrics: - Revenue trends – Past and projected growth -EBITDA and profit margins – Business profitability - Cash flow strength – Can the company service debt? - Debt-to-equity ratio – Is it overleveraged? - Liabilities vs net worth – Financial health assessment Banks may alter terms, demand collateral, or reject a deal if ratios indicate high risk. B. Collateral and Security Assessment -Type & quality of collateral – Real estate, inventory, receivables - Liquidity of assets – Can funds be recovered if needed? - Loan-to-value ratio – Is the loan amount justified by the collateral value? Strong collateral can't compensate for weak financials in securing approval. C. Industry & Market Risks -Industry stability – Is it growing or declining? - Comparing the company against competitors - Impact of economy – Are interest rates, inflation, or regulations influencing the industry? Even profitable businesses could face approval difficulties if their industry is deemed high-risk. 3. Crafting a compelling loan proposal enhances approval odds. - Demonstrate stability through steady revenue growth and strong governance - Highlight risk mitigation – Outline plans for downturns -Present strong cash flow models – Repayment ability is key -Be specific about loan use – Vague fund allocation raises doubts - Provide realistic projections – Over-optimism reduces credibility Well-prepared proposals align borrower needs with lender risk appetite. 4. Bank's Final Decision: - Approval – Financials, collateral, and risks meet credit policies - Conditional approval – Additional guarantees, revised terms, or documentation required - Rejection – If the financial risk is deemed excessive or criteria aren't met Incomplete documents, disorganization, and unrealistic goals frequently result in loan rejections. Grasping bank criteria enhances approval odds. Key Takeaway: Approval depends on a well-structured, risk-managed proposal, not solely on business strength. - For borrowers, organized files boost approval odds and loan conditions. - For consultants, structuring compliant deals accelerates funding. - Efficient documentation accelerates lender decisions. Craft irresistible deals rather than just persuading banks. What loan application mistakes have you seen? Share in the comments.

I have facilitated more than 2000 crore debt for 800+ companies & decoded exactly how lenders evaluate companies ↓ Indian startups raised thousands of crores in debt funding last year, yet most founders don't understand how lenders actually evaluate their companies. Let me break down each lender type and what they look for 1. Venture Debt Funds These specialized lenders focus on funded startups: → Typical funding: ₹2Cr - ₹75Cr → Usual tenure: 18-36 months → Interest range: 14-18% What they evaluate ↓ - Recent equity funding (Series A or beyond preferred) - Minimum 6-12 months of revenue history - Clear path to profitability - Strong gross margins (40%+ preferred) - Growth trajectory (ideally 30%+ YoY) - Monthly net burn under control - Strong founding team Think of venture debt as an extension of your equity round. 2. Revenue-Based Financing The newest category of lenders: → Typical funding: ₹10L - ₹3Cr → Usual tenure: 6-12 months → Repayment: Percentage of your monthly revenue What they evaluate↓ - At least 6 months of consistent revenue - Digital footprint and online sales data - Customer retention metrics - Marketing efficiency - Revenue growth trends - Gross margins (30%+ typically required) - Clean financial records These lenders use tech to analyze your business performance. They evaluate your online sales data, payment gateways, and marketing metrics. 3. Traditional Banks The most established but hardest for startups: → Typical startup funding: ₹50L - ₹5Cr → Usual tenure: 12-36 months → Interest range: 12-16% for startups What they evaluate ↓ - At least 2 years of operations - Profitability for 1+ financial years - Strong balance sheet fundamentals - Collateral (often 50-100% of loan value) - Founder credit scores - Consistent GST returns - Low debt-to-equity ratio Banks look at your past, not your potential. They want established businesses with assets and profitability. 4. NBFCs & Digital Lenders Bridging the gap between banks & new-age lenders: → Typical funding: ₹10L - ₹2Cr → Usual tenure: 6-36 months → Interest range: 15-24% What they evaluate ↓ - Minimum 1 year of operations - 6+ months of stable revenue - Bank statement analysis - Digital transaction history - GST filing consistency - Alternative data signals - Founder credit history NBFCs are more flexible than banks but more established than RBF players. They use both traditional and alternative data to assess your business. 5. Government Schemes ↓ Focused on boosting the startup ecosystem: → Credit Guarantee Scheme for Startups (CGSS) → Fund of Funds for Startups (FFS) → State-specific startup funds What they evaluate ↓ - DPIIT recognition - Viable business model - Clear use of funds - Innovation potential - Sector priorities - Clean credit history These schemes often reduce risk for banks lending to startups. Every type of debt has its purpose The key is knowing which door to knock

Hot take: SBA 7(a) business acquisition loans are not underwritten on a projected basis. Yes—lenders ask for projections. No—that’s not what drives approval. What actually matters most in the target company? Historical returns and interim financials that support the debt—on both valuation and DSCR. If the business’s actual EBITDA or SDE (with legitimate addbacks) can’t carry the loan, the deal’s not getting done. Even if you see all the upside in the world… Even if you think the company will be the next unicorn. SBA lenders don’t fund potential. They fund performance. So if you’re eyeing an SBA 7(a) loan, remember: to lenders, the past must carry the debt, not just the future you hope to build.

CIBIL 750 but loan rejected? Here's what banks don't tell you: 5 Hidden Factors: 1. DTI (Debt to Income) Ratio ↳ EMIs should be <40% of income ↳ ₹1L salary + ₹45K EMIs = 45% (Too high!) 2. Credit Utilization ↳ Use <30% of credit limit ↳ ₹2L limit, using ₹1L = 50% (Red flag!) 3. Credit History ↳ 750 score + 6 months vs 720 + 3 years? ↳Banks prefer 720. 4. Multiple Inquiries ↳ 3+ loan applications in 3 months = Red flag 5. Job Stability ↳ 3+ job changes in 2 years = High risk Let's take an example: ↳Person A: 780 CIBIL, 55% DTI, job hopping = REJECTED ↳Person B: 720 CIBIL, 35% DTI, stable job = APPROVED Here's what you can do to prevent loan rejection: ↳ Keep DTI <40% ↳ Show job stability ↳ Use 30% credit limit ↳ Build longer credit history ↳ Avoid multiple applications Your CIBIL opens the door. These 5 factors get you the loan. P.S. - What would you add? Tips for not getting loan rejected? REPOST ♻️ to help others! ====== Follow me (Ritesh Sabharwal CFP®) as I Simplify Personal Finance and Investing

As an entrepreneur, considering a business loan can be both exciting and nerve-wracking. Having been a banker for two decades, I want to share the top 5 crucial factors to consider when seeking financing for your business: Take stock of where your business stands – whether you’re just starting out, generating revenue, or navigating break-even/profitability, or growth. This will help guide you to the right loan fit. Dive deep into your cash flow dynamics and understand your expenses on a monthly, quarterly and annual basis. A robust inflow shows your ability to cover loan repayments which can boost confidence – yours and the lender's. Your credit history weaves part of your overall narrative. A strong personal and business credit score can be a game-changer in loan approval, and denial. Define your funding needs precisely. Clarity on the capital required sets a strong foundation for your loan pursuit. Articulate how the funds will fuel your business. How they will be used and when. A compelling vision for the loan supports your application. Remember, the journey doesn't end with numbers. The right lender is your partner. Scrutinize terms, understand APR/interest rates, loan duration, and personal guarantees. Seek a lender with a reputable track record. And one that understands and works with small businesses. #EntrepreneurLife #BusinessGrowth #FinancialPlanning #BusinessLoans #SmallBusinessTips #womenowned #smallbusiness #founder 

👥 Conversation between Borrower & Credit Manager Borrower (Mr. Arjun): “I need a loan for my business. I’ve given you my financial statements — why are you asking for so many other details?” Credit Manager (Mr. Ravi): “Because a loan is not just about numbers, Arjun ji. We check both quantitative and qualitative sides.” Borrower: “Quantitative I understand — sales, profits, ratios. But what’s qualitative?” Credit Manager: “Great question! Here’s what I mean 👇” 1. Promoter’s Character & Reputation - Do you have a good repayment history? - Any cheque bounces, defaults, or CIBIL issues? Because even profitable businesses can fail if the promoter lacks integrity. 2. Business Model & Industry Risk - Is your industry stable or highly volatile? - Will your business survive if market conditions change? Numbers look good today, but what about tomorrow? 3. Cash Flow Reality - Paper profit ≠ Cash in hand. - We check if your business actually generates cash to repay EMIs. 4. Collateral & Guarantees - What backup security do you provide? - Banks want comfort in case business struggles. 5. Management Capability - Do you have experience running this business? - Do you manage operations, compliance, and people well? Borrower: “Hmmm… so you’re saying even if my financials are strong, without credibility and future visibility, loan approval can be tough?” Credit Manager: “Exactly! Loans are given to people, not just balance sheets.” #FinanceTips #Banking #CreditAnalysis #BusinessLoans #FinancialWisdom #CorporateFinance Best regards: CA Ankush Jain

𝗪𝗵𝘆 𝗗𝗦𝗖𝗥 𝗶𝘀 𝗘𝘀𝘀𝗲𝗻𝘁𝗶𝗮𝗹 𝗳𝗼𝗿 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀 𝗮𝗻𝗱 𝗟𝗲𝗻𝗱𝗲𝗿𝘀 📌 Every business owner seeking financing should understand one critical metric: Debt Service Coverage Ratio (DSCR). It’s more than a number; it’s a mirror reflecting your business’s financial health and its ability to meet debt obligations. But why do lenders prioritize this metric so heavily? And why should it matter to you? 🤔 DSCR measures how well a borrower’s income covers their debt payments. A DSCR of 1.25, for example, means your business generates $1.25 in income for every $1 of debt obligation—a comfortable cushion. On the flip side, a DSCR below 1 signals trouble: your income isn’t sufficient to cover what you owe. From a lender’s perspective, DSCR answers the most fundamental question: Can this borrower reliably repay their debt? 💰 It’s the cornerstone of risk assessment. A higher DSCR reflects lower risk, better loan terms, and a stronger case for approval. This is why lenders use it as a primary variable when evaluating loan requests. But understanding DSCR isn’t just for lenders—it’s a powerful tool for you as a business owner. When you know your DSCR, you’re not just preparing for a loan application; you’re laying the foundation for financial clarity. It helps you identify risks, optimize cash flow, and position your business for growth. Here’s how to find it: ▪️ 1. Calculate your Net Operating Income (NOI) or EBITDA (earnings before interest, taxes, depreciation, and amortization). ▪️ 2. Sum up your Total Debt Service (TDS)—principal and interest payments. ▪️ 3. Divide NOI or EBITDA by TDS. If the result is below 1, it’s time to strategize. Can you reduce expenses? Increase revenue? Restructure debt? Improving your DSCR isn’t just about qualifying for financing; it’s about building a business that’s financially resilient. Lenders use DSCR to ensure a loan benefits both sides. And when you approach financing with a clear understanding of your DSCR, you become a partner—not just a borrower. So, do you know your DSCR? If not, it’s time to find out. Your financial clarity depends on it. 🔍 #smallbusiness #innovation #bankingindustry #entrepreneurship #lending #finance