Understanding Bank Finance Proposals: What Borrowers and Their Advisors Should Examine Before Approaching a Lender

A Practical Guide to Finance Requirements, Financials, CMA, Ratios, Repayment Capacity and Supporting Documents

By Ashok Kakkar

Advocate | Insolvency Professional | Former Banker | M.Com, LLB, LLM, CAIIB

Background

For most entrepreneurs, approaching a bank for finance begins with one simple question: “How much loan can the bank give me?” A more useful starting point is: “What exactly does the business require, for what purpose, through which facility, in what amount, and on what basis can it be repaid?”

A bank finance proposal is not merely an application accompanied by financial statements and security documents. It is a financial presentation of the borrower, the business, the requirement, the proposed facility, and the borrower’s ability to service the resulting obligation. In practice, proposals generate repeated queries not necessarily because the underlying business is unacceptable, but because the requirement has not been properly assessed, the projections are inadequately supported, the documents do not tell a consistent story, or the proposal has not anticipated the questions a credit appraisal will naturally raise.

This is where professionals — chartered accountants, consultants, advocates and insolvency practitioners who prepare or vet proposals for clients — play a valuable role. Their task is not limited to collecting documents; it is to examine the proposal before it reaches the bank, identify gaps, and help the borrower present the case in a manner that lets the lender understand it without unnecessary back-and-forth. This article sets out, from a borrower’s and an advisor’s perspective, what should be examined before a proposal is submitted.

1. There Is No Single Format for Every Proposal

The first principle to understand is that the level and nature of a proposal should be proportionate to the size, purpose, risk and complexity of the facility sought. A proposal for a few lakh rupees cannot be expected to carry the same complexity as a large project involving land, building, machinery, working capital and multiple banking facilities — and a small trading business, a vehicle or housing loan, a MUDRA facility, an existing manufacturing unit, a new project and an export business will each call for a different emphasis, examined in more detail later in this article. The objective is not to produce unnecessary paperwork; it is to provide the right information at the right level of detail.

2. Identify the Borrower, the Business, and What Is Being Financed

Before the financing structure is developed, three basic questions deserve a clear answer, since each of them shapes what the rest of the proposal should contain.

Who is the borrower

The borrower may be an individual, a proprietor, a partnership firm, an LLP, a private or public limited company, a trust, a society, or another eligible entity. The constitution determines the relevant documents, the authority to borrow, the applicable financial statements, the ownership structure, and the guarantees and security arrangements that will need to be put in place — an aspect examined further under documentation later in this article.

What is the business

The proposal should clearly identify whether the activity is trading, manufacturing, services, a professional practice, retail, construction, export or import, infrastructure, real estate, agriculture or allied activity, or another specialised line — since the nature of the business determines which financial information actually matters, as discussed under activity-specific emphasis below.

What is being financed

The proposal should identify whether the requirement relates to a new business, an existing business, expansion, diversification, replacement or modernisation, purchase of machinery, construction of a building, additional working capital, acquisition of an asset, refinancing where permissible, or a specific one-off transaction. Only once these three questions are settled should the purpose and quantum of finance be worked out.

3. Establish the Purpose and Quantum Together

The purpose should be specific: “purchase of machinery costing ₹80 lakh for expansion of production capacity” tells a banker far more than “finance required for business expansion.” The amount should follow from a proper calculation rather than from the maximum figure the borrower hopes the bank will sanction. For working capital, this means examining projected turnover, inventory holding, receivables, creditors, the operating cycle, existing working-capital facilities and the borrower’s own margin contribution. For a term loan, it means the total project or asset cost, the promoter’s own contribution, other sources of finance, the resulting bank finance, the implementation schedule and the expected financial benefit. The principle is simple: calculate the requirement first, and determine the borrowing structure afterward — a mismatch between the two, discovered by the banker rather than disclosed by the borrower, is usually the first query a proposal attracts.

4. Match the Requirement to the Right Facility

A proposal should not be prepared for a generic “loan”; the facility sought should correspond to the actual requirement. Fund-based facilities — term loan, cash credit, overdraft, working capital demand loan, and vehicle or equipment finance — involve direct disbursement and are appraised largely on the purpose and quantum established above. Non-fund-based facilities — letters of credit, and bank guarantees whether performance or financial — do not involve immediate disbursement but create a contingent liability for the bank, and are assessed for the margin required, the underlying contract or purchase order, and the borrower’s capacity to honour the obligation if it is invoked. Businesses engaged in international trade bring additional considerations — the trade cycle, pre-shipment and post-shipment requirements, letters of credit, foreign-currency exposure, and the working capital that the shipment-and-payment cycle itself demands. A proposal seeking a combination of these facilities should address each set of considerations rather than treat them as interchangeable.

5. Let the Financials Become the Core of the Proposal

A bank finance proposal ultimately has to be supported by numbers, and the financial statements should not merely be attached as documents — they should be analysed and explained.

Historical financial performance

Depending on the size and nature of the proposal, two or more years of turnover, gross and net profit, tangible net worth, total outside liabilities, working capital, inventory, receivables, creditors and existing debt should be presented, so the lender can see the financial trajectory of the business rather than a single snapshot.

Sales projections and profit estimates

Projected turnover and profit should rest on identifiable assumptions — is additional capacity being created, are there confirmed orders, is a new market or product involved, is a change in distribution expected, are margins likely to hold. If projected turnover rises substantially over historical performance, the reason should be capable of being demonstrated, not merely asserted.

Cash accrual and surplus

Profit on paper does not answer the repayment question; what matters is the cash the business actually generates. The proposal should show the progression from profitability to cash accrual, to what remains after existing commitments, to the surplus genuinely available for debt servicing — a far more useful presentation than simply asserting that the borrower has “repayment capacity.”

6. CMA Data, Where Required, Should Tell the Same Financial Story

For appropriate working-capital and other proposals, the bank may call for CMA (Credit Monitoring Arrangement) data or a similar prescribed financial analysis. This should not be treated as a separate exercise: it should reconcile with the audited financial statements, the current financial position, the projected sales and profitability, the working-capital requirement, the balance sheet, and the cash or fund flows presented elsewhere in the proposal. An inconsistency between the CMA data and the rest of the financial information becomes an immediate point of query, so CMA preparation should be an analytical exercise carried out with the borrower’s chartered accountant, not a form-filling one, and every assumption used in it should be capable of explanation.

7. Ratio Analysis Should Translate the Financials Into Credit Information

Financial statements contain information; ratio analysis helps interpret it. For a proposal of appropriate size, the relevant ratios should be presented for both historical and projected periods. The current ratio examines short-term liquidity through the relationship between current assets and current liabilities. The debt-equity ratio indicates the balance between external debt and the borrower’s own funds, and the level of financial leverage this represents. The debt service coverage ratio (DSCR), particularly relevant for term finance, assesses whether the projected cash accrual is adequate to meet the proposed debt-servicing obligation. Profitability ratios — gross margin, net margin, return on capital employed — indicate whether the business is generating adequate returns on the capital deployed in it, and inventory turnover and receivables turnover indicate how efficiently stock is converted into sales and sales into collected cash. Depending on the proposal, ratios relating to working-capital utilisation, capital structure, interest coverage or operating efficiency may also be relevant. The point is not to fill the proposal with every ratio available, but to select the ones relevant to the business and the facility, compare the historical and projected position, and explain any significant movement — ratio analysis should support the narrative, not merely occupy a page.

8. The Repayment Period Should Match the Purpose and the Cash-Flow Pattern

The tenor of a facility should not be selected merely because the borrower wants a longer period to ease immediate repayment pressure. It should correspond to the useful life of the asset being financed, the nature of the investment, the expected pattern of cash generation, any gestation period involved, the operating cycle, and the borrower’s demonstrated repayment capacity. A machinery purchase may reasonably generate cash over several years and be financed accordingly; a short-term working-capital requirement, by contrast, should not automatically be converted into long-term debt simply to make the repayment schedule more comfortable. The proposal should explain why the proposed tenor and repayment structure genuinely fit the underlying requirement.

9. End-Use, Existing Debt, and Security

The proposal should state exactly how the funds will be deployed, and the borrower should be able to demonstrate that deployment later. Before adding new debt, the full existing debt position — term loans, cash credit, overdrafts, equipment finance, unsecured loans, guarantees and contingent liabilities — should be disclosed in full, since the real question is whether the business can carry its total debt burden once this facility is added, not whether this facility alone can be repaid. Where security is offered, ownership, title, valuation, existing charges, insurance and the location or details of the asset should be verified and the documentation kept ready in advance. Security should be presented alongside the business case, not in place of it — the fundamental question remains how the borrowing will be serviced from the business or the identified source of repayment.

10. Disclose Compliance Status, Litigation and Contingent Liabilities

A financing proposal should not present only the positive side of the business. Income-tax and GST compliance, applicable registrations, licences, statutory filings, insurance and regulatory approvals should be current and verifiable, with any pending liability disclosed upfront. Equally, pending litigation, notices from authorities, material disputes, guarantees given, and contingent liabilities that have not yet crystallised should not be left out simply because they are inconvenient. The existence of litigation does not automatically make a proposal unacceptable — what matters is that the lender can understand the nature of the dispute, the amount involved, its present status, the possible financial impact, and the borrower’s own assessment of it. Full disclosure allows the lender to make an informed assessment rather than an adverse one formed after discovering the matter independently.

11. Review the Existing Banking Relationship and Disclose Risk

Where the borrower already has banking facilities, the conduct of those accounts—repayment record, cheque returns, if any, excess drawings, timely submission of stock statements, compliance with sanction terms, and existing guarantees or LC exposure—forms part of the credit assessment, whether or not specifically mentioned in the proposal. The experience, background and track record of the promoters should also be clearly presented, particularly where their managerial or industry experience is relevant to the business or project. Any past irregularity is better disclosed and explained upfront than left for the banker to discover during appraisal. The same principle applies to business risk generally: no business is risk-free, and customer concentration, seasonality, delayed receivables, supplier dependence or raw-material price volatility should be named directly, each with the specific step being taken to manage it. A banker reads a proposal that acknowledges its risks with a credible mitigation plan far more favourably than one that appears to be concealing something.

12. Match the Depth of Analysis to the Size and Type of the Proposal

The larger and more complex the exposure, the deeper the analysis needs to be — and the reverse is equally true. A small MUDRA or micro-business proposal, of the order of a few lakh rupees, is ordinarily served by establishing identity and constitution, the business activity, the purpose, existing performance, projected turnover, basic profitability, banking conduct, applicable compliance, and security where relevant, without the full CMA-and-ratio treatment a larger term loan would need.

A small retail or trading proposal turns mainly on sales, margins, inventory, receivables, supplier credit and banking conduct. Vehicle finance is asset-specific — the vehicle, its cost, the borrower’s own contribution, the proposed loan and repayment period, and the income available to service it. Housing finance centres on the property, the applicant’s income and repayment capacity, title and margin. Education finance turns on the course, the institution, the fees, the student’s and borrower’s profile, and the repayment structure once the course is complete. There is no justification for building a large-project-style file where the facility itself does not call for one, just as there is no shortcut available for a facility that genuinely does.

The distinction between an existing business and a new project matters in the same way. An existing unit has a track record to draw upon — historical sales, profitability, existing customers, banking conduct and past performance. A new project has no such history, and the proposal has to rely instead on the promoters’ background, project feasibility, market assessment, project cost and contribution, the implementation schedule, and projected operations, cash flows and break-even considerations. The advisor’s starting question should simply be: what evidence actually exists to support this proposal — the past performance of a running business, or the feasibility of a project yet to begin?

The nature of the business activity shapes the proposal further. A manufacturing unit is examined on installed and proposed capacity, machinery, raw material and production cycle, and project cost alongside working capital. A trading business turns on the purchase-and-sales cycle, inventory turnover, and supplier and customer credit.

A services business is assessed on service capacity, customer contracts, the billing cycle, receivables, manpower cost and recurring income rather than on inventory at all. An export or import business brings in the trade cycle, buyers and suppliers, shipping documentation, letters of credit, foreign-currency exposure and the applicable regulatory requirements. The proposal should reflect the actual economics of the business concerned, rather than use language generic enough to fit any of them.

13. Present the Proposal in a Logical Sequence

A well-prepared proposal allows the credit officer to follow the case without reconstructing it from scattered documents. A practical sequence moves from an executive summary of the borrower and the request, to the borrower’s constitution and the business profile, the purpose and calculation of requirement, the facility sought, historical and projected financials with CMA data and ratio analysis where applicable, the existing debt position and repayment structure, security and guarantees, statutory compliance and any litigation or contingent liabilities, risks and mitigation, and finally the end-use and implementation plan, with supporting documents indexed at the end. Organising the file this way converts a collection of papers into a coherent credit proposal, and is often the difference between a file the credit officer can read in one sitting and one that generates repeated requests for clarification.

14. Conduct a Pre-Submission Review

Before the file is submitted, the professional advising the borrower should ideally conduct one final review, asking of every element: “If I were the credit officer examining this proposal, what observation would I raise here?” That review should cover whether the business and the borrower are clearly identified, whether the purpose and quantum are properly established, whether the financials, CMA data and ratios reconcile with each other, whether cash accrual and the proposed tenor genuinely support repayment, whether all liabilities, security and compliance matters are disclosed, whether the end-use is clear, and — finally — whether the file itself is complete, properly indexed, and free of contradictions between its own documents. Collecting documents is administrative work; identifying the questions those documents may generate is where the professional’s value actually shows.

A Quick Checklist Before You Approach the Bank

• Are the borrower’s constitution, the business activity, and what is being financed all clearly identified?
• Is the purpose specific, and is the amount calculated rather than assumed?
• Is the facility sought — fund-based, non-fund-based, or trade finance — the right match for the requirement?
• Do the historical financials, projections, CMA data and bank/GST/tax records all tell one consistent story?
• Do the current ratio, debt-equity ratio, DSCR, profitability and turnover ratios support the claims made elsewhere in the proposal?
• Does the proposed repayment period genuinely match the asset’s life and the business’s cash-flow pattern?
• Have all existing borrowings, guarantees and contingent liabilities been disclosed in full?
• Are security documentation, statutory compliance, and any litigation or notices disclosed and explained?
• Has the conduct of any existing banking relationship been reviewed?
• Has the depth of the proposal been matched to its size and type — rather than following one template for every case?
• Is the file logically sequenced, indexed, and free of contradictions between its own documents?

Conclusion

A bank finance proposal should begin before the loan application is filled in — with a clear understanding of the borrower, the business, the purpose of finance, the amount genuinely required, and the facility that actually corresponds to that requirement. The financial section then brings the proposal together: historical performance, projected sales and profit, cash accrual and surplus, CMA data where required, and the ratios that let the lender test all of it objectively. The depth of this analysis should match the size and complexity of the proposal — a small MUDRA or retail loan does not need a large-project treatment, just as a major expansion cannot be reduced to one.

Put together, the article follows one working sequence that a borrower or advisor can use almost as a checklist in itself: borrower and business, purpose, quantum, facility, financials, CMA data, ratios, repayment structure, security, compliance, risk, documentation, and finally a pre-submission review. A proposal built in this order does not merely collect the right papers — it tells the lender who is borrowing, why, how much, through what facility, on what financial basis, and how the borrowing will actually be repaid.

A well-prepared proposal cannot guarantee sanction — the final decision remains with the lender, after its own independent appraisal, verification and applicable credit policies. But careful, proportionate preparation can achieve something genuinely useful: it reduces avoidable queries and repeated submissions, and lets the lender spend its time on the substantive credit assessment rather than chasing missing information.

Message to Readers

To borrowers and entrepreneurs: before approaching a bank, do not ask only “how much can I borrow.” Ask what your business genuinely requires, why it requires it, and whether the business can responsibly service the borrowing.

To professionals advising borrowers: your role goes beyond preparing financial statements or compiling documents. Examine the proposal as a credit officer would, before the bank does — the requirement, the financials, the projections, the ratios, the repayment structure, the liabilities, the security, the compliance position and the documentation — and address the likely observations wherever possible before submission.

To banking and finance students: credit appraisal may begin at the bank, but preparation for it begins with the proposal. The quality of a credit decision depends significantly on the quality of the information and analysis placed before the decision-maker.

Disclaimer

This article is for general educational and informational purposes only and reflects the author’s professional experience. It does not constitute legal,       financial, accounting or credit advice, nor does it guarantee loan sanction. Lending decisions depend on the nature of the proposal, applicable lender policies, documentation, verification and independent credit assessment. Readers should consider the circumstances of their individual case and seek appropriate professional advice where necessary..

Ashok Kakkar

Advocate | Insolvency Professional | Former Banker

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