Business loan applications are rarely rejected because the business is weak. They are rejected because the file does not let the credit officer say yes. Numbers that contradict each other across the ITR, the GST returns and the projections will sink an otherwise fundable proposal, and the applicant is usually never told which line caused it.
Loan documentation is the work of assembling that file so it holds together.
What a lender is actually assessing
A credit officer is answering four questions, in order:
- Can this borrower repay? Established from past financials and the strength of projected cash flows.
- Is the borrower who they say they are? KYC, constitution documents, and a consistent record across PAN, GST and the MCA.
- What happens if repayment fails? Collateral, guarantees, or a credit guarantee scheme standing in place of security.
- Does the file hang together? Whether the turnover in the ITR matches the GST returns, whether the bank statements support the declared sales, whether the projections follow from the actuals.
The fourth question is the one applicants underestimate. A file that answers the first three well and fails the fourth reads as unreliable, and unreliable is harder to recover from than merely thin.
The core document set
| Category | What lenders ask for |
|---|---|
| Identity and constitution | PAN and Aadhaar of proprietors, partners or directors, and the incorporation certificate, partnership deed or LLP agreement |
| Business proof | GST registration, Udyam registration, trade licence, and any sector specific licence |
| Financials | Audited financial statements and income tax returns, usually for the last 2 to 3 years |
| Banking | Statements for the main operating accounts, commonly 6 to 12 months |
| Tax compliance | GST returns for the period, matching the declared turnover |
| Existing borrowings | Sanction letters and repayment track for every live facility, including those with other lenders |
| Security | Title documents, valuation reports and encumbrance certificates where collateral is offered |
| Forward looking | Projected financials, and a project report or CMA data depending on the facility |
A new business has no past financials, which changes the emphasis rather than removing the requirement. The projections and the project report then carry the entire case, and they are read far more sceptically.
CMA data: the part most applications get wrong
CMA data, prepared under the Credit Monitoring Arrangement format, is what banks require for working capital limits and most term loans. It is not a summary of your accounts. It is a specific set of statements that lets the bank compute how much it is willing to lend.
A complete CMA set covers existing and proposed limits, an operating statement, an analysis of the balance sheet, a comparative statement of current assets and current liabilities, the working capital assessment, a fund flow statement and ratio analysis. It usually spans two years of audited actuals, the current year on an estimated basis, and two to three projected years.
Banks assess working capital limits using the Tandon Committee methodology, which funds only a portion of the working capital gap and expects the borrower to meet the balance from long term sources. Two benchmarks follow from it and are worth knowing before you build projections:
- a current ratio of around 1.33 is the conventional expectation for working capital facilities
- a debt service coverage ratio comfortably above 1 is expected on term loans, with many lenders looking for 1.5 or better on an average basis
Projections that ignore these produce a number the bank will simply reduce. Projections built with them in view produce a limit the bank can sanction as requested.
The most common defect we see is projections that are unconnected to the actuals behind them. A business growing at 12 percent that projects 60 percent growth, with no new capacity, no new customer and no explanation, invites the officer to discount the whole file.
The project report
Where the facility funds something specific, a new unit, new machinery, an expansion, the project report carries the case. It should set out what is being built, what it costs, how it will be funded between promoter contribution and borrowing, the implementation timeline, and the revenue the completed project generates.
Promoter contribution is the line to get right. Lenders expect the promoter to fund a meaningful share of the project cost, and a report showing negligible promoter contribution reads as a promoter unwilling to carry risk they are asking the bank to carry.
Scheme backed loans and what they change
Several government schemes change the security position rather than the documentation standard. The file still has to be complete.
| Scheme | Broad coverage | What it changes |
|---|---|---|
| Mudra, under Shishu, Kishore and Tarun | Up to Rs 10 lakh for micro enterprises | Collateral free, with a Tarun Plus category extending to Rs 20 lakh for borrowers who have repaid an earlier Tarun loan |
| CGTMSE | Credit guarantee for micro and small enterprises | Guarantee cover in place of collateral, with the ceiling raised to Rs 5 crore |
| PMEGP | Project cost up to Rs 50 lakh for manufacturing and Rs 20 lakh for service | Capital subsidy, subject to eligibility and a promoter contribution |
| Stand Up India | Rs 10 lakh to Rs 1 crore | Facility for SC, ST and women entrepreneurs setting up a greenfield enterprise |
Eligibility, margin and subsidy conditions under each scheme are revised periodically, and branch level practice varies. We confirm the current position with the lending branch rather than relying on a scheme brochure.
Which facility are you actually applying for?
The file follows the facility. Applicants frequently prepare a generic set of documents and then discover the lender wanted something structurally different.
| Facility | What it funds | What the file leans on |
|---|---|---|
| Cash credit or overdraft | The working capital cycle, drawn and repaid continuously | CMA data, current ratio, and periodic stock and debtor statements |
| Term loan | A specific asset, machine or project, repaid on a fixed schedule | Project report, debt service coverage, promoter contribution |
| Loan against property | General business requirements, secured on real estate | Title documents, valuation and legal search, plus repayment capacity |
| Bill or invoice discounting | Receivables owed by named buyers | Buyer quality, debtor ageing and the past realisation record |
| Unsecured business loan from an NBFC | General requirements over a short tenor | Bank statement analytics and GST turnover, with less weight on projections |
The distinction that matters most is between a cash credit limit and a term loan. A cash credit limit is sized from your working capital gap and reviewed every year. A term loan is sized from the cost of what you are buying and the cash flow available to service it. Applying for one with the file built for the other is a common and avoidable delay.
After the file is submitted
Sanction is not the end of the documentation. Expect the lender to raise a query list, and expect the terms in the sanction letter to be read closely before acceptance, because covenants on further borrowing and on withdrawal of promoter funds are set there.
A working capital limit then carries ongoing obligations. Most branches require periodic stock and debtor statements, and the limit itself comes up for renewal annually against fresh financials. A borrower who treats the renewal as a formality and submits late can find the limit reduced or the account classified irregular, neither of which reflects the underlying business.
Why applications get rejected
- Turnover that differs between the ITR and the GST returns. The single most common cause. It gets read as misreporting even where the explanation is innocent.
- Bank statements that do not support declared sales. Cash heavy businesses are especially exposed here.
- Projections with no bridge from the actuals. Growth assumptions stated without a reason behind them.
- Undisclosed existing borrowings. The credit bureau report shows them anyway, and the omission costs more than the loan would have.
- A weak or absent promoter contribution in the project report.
- Stale or incomplete title documents where collateral is offered.
- An incomplete file submitted in the hope of filling gaps later. Each round trip resets the officer's timeline and weakens the proposal.
What it costs
Our fee of Rs 1,499 covers the assembly and review of the document set, the CMA data or project report as the facility requires, and the reconciliation work across your ITR, GST returns and bank statements.
Valuation reports, legal search reports on collateral, and any lender processing fee are charged by the respective provider and are not included, because they are paid directly and vary by lender and by property.
Why businesses use LegalX India
We prepare the file the way a credit officer reads it. That means reconciling the turnover across your returns before the bank finds the gap, building projections that follow visibly from your actuals, and presenting the working capital assessment in the format the branch expects rather than one they have to rework.
Where a scheme applies, we confirm the current eligibility and margin position with the lending branch first, because scheme terms move and branch practice varies.
If you need the underlying documents built out, see CMA data preparation, project report and business plan.