Money is the life and blood of any business. The availability and flow of money determine how smoothly a business will operate. Companies are set up with the hope that the Return on Investment (ROI) will be high to benefit investors. Liquidity is a significant factor in business, and improved liquidity results in larger volumes of business being handled.
Hence, every business person will try to pump in as many funds as possible. Since own investible funds will be limited, getting additional funds is very useful to leverage business operations. Banks are one of the best sources for this need. To raise funds through banks, you have to submit a business loan project report in a specific project report format for bank loan. If done correctly, banks will scrutinise, approve and disburse the loan.
Did you know? Pradhan Mantri MUDRA Yojana and venture capitalists also ask for a project report before allotting any amount of money.
The Bank Loan Process
Now that you know the benefit of taking a bank loan instead of blocking your funds, let us understand how banks operate. A bank loan is sanctioned on project planning done by you, and there are a few steps to be taken as follows:
- You must prepare a detailed project report for a business loan for starting a new business and submit several documents supporting the loan application.
- In the project report for a business loan, you must present the project idea and how your products or services will be helpful to the customers.
- You should submit the project report as stipulated by the lending bank.
- The bank will then study the application, appraise it as per the bank’s norms and finally decide whether or not to approve your loan.
How to Make a Project Report for Bank Loan to Start a New Business?
Let’s look at various aspects of preparing and submitting a Project Report for a Bank Loan to Start a New Business.
Prerequisites of a Project Report
There are a few prerequisites to creating a project report format for loans. They are
- The bank should approve the loan project report format, and the communication should be clear, crisp and simple.
- Documentary evidence or references should support all information and data provided.
- The project's purpose should be covered in the objectives of the business. In the case of a private or public limited company, the purpose should be in alignment with the company’s Memorandum and Articles of Association.
- The business should be lawfully permitted to operate in the country.
- The commercial viability of the proposed business must be established.
- Authorised persons should sign the project report and loan application to represent the company.
Elements of a Project Report
While there could be some variations depending on specific circumstances, the following are the general elements when submitting a project report for a loan application.
- Introduction of Your Company.
This will include full details of the nature of the business, the founders, products offered, markets served and so on. You should cover the promoters' background, including their experience in the industry for which the project report for a business loan is being taken.
- The status of your present business with an overview of its financials.
If it is a running business, you should provide the present balance sheet, profit and loss account and the company's status as of the date.
- Briefly describe the project's purpose for which you seek a business loan.
The bank should be convinced by reading the project report for business loans that there is a clear and specific purpose for which the loan is being applied, and it cannot be vague or for meeting general expenses.
- A summary of the project broadly indicates the financials, whom its products or services will benefit and the profitability of the proposed business.
A business is worth only to the extent that its products and services are needed in the market. Also, the founders should be aware of the overall financials involved regarding the total funds required and the business's profitability on a sustained basis.
- A description of the business processes involved.
For example, if it is a manufacturing activity, details of the plant and equipment, the manufacturing process, human resource requirement, material requirement and so on. Suppose it is a trading company, warehousing facilities, logistics arrangement, etc.
- The time frame in which the project will be implemented and commercialised.
Projects, unlike a running organisation, cannot be open-ended. You, as the promoter, should have total clarity of the project schedules and when you can transform the project into an earning proposition.
- About the founders:
Names and all details of founders/promoters, their background and all points to convince the bank that they have the necessary knowledge, experience and competence to run the proposed business effectively.
- About the Team:
This pertains to the requirement of staff and workers to run the operations smoothly and uninterruptedly. This should cover the number of people, the required qualifications and experience, the proposed salary structure, the organisation chart and a clear assignment of roles and responsibilities.
Details of the availability of the required business premises to start the proposed activities. Any other necessary infrastructure to start and operate the proposed business.
- Market Focus:
Details of prospective customers, the industry segments they belong to and supporting data on the present status and growth prospects of their industries.
- Area of Operations:
The Area of operations can be of many types, such as single-location, multi-location, domestic, global etc. If it is multi-location based, details of requirements in each location should be provided.
- Present Tie-ups, if any:
You should specify if there are any existing financial or technical collaborations with anyone else.
- Pre-existing Loans:
You should fully declare any existing loans from banks or any other sources. Missing or misleading information can lead to the rejection of the loan.
- Funding requirements:
You should have very clear workings of funding requirements. You should take every requirement, small or big, as changes in loan amounts later will be complex and cumbersome.
- Liquidity Analysis:
You should prepare and submit the fund's flow and cash flow statements for a period covering not lesser than the repayment period.
You should present project viability calculations that reflect the business's profitability based on conservative assumptions.
- Balance Sheet and P&L:
You should enclose the projected balance sheet and profit and loss statements for the loan period.
- Breakeven Analysis:
You should show the project's breakeven analysis, reaffirming the achievability of the forecasts you and your co-promoters made.
The bank may need other information to complete the application per their business project report format for bank loans.
Also Read: What is the Mudra Loan Eligibility Criteria?
Bank Loan Application Form Sample
Each bank has its standardised application form and project report format for bank loans. You can see one such sample by downloading it from the link below.
Different Types of Financial Ratios
Banks and Financial Analysts go purely by data and specific tools per standard practice in the banking industry. Most of these are in the form of Ratios, and the following is the list of various ratios and understandings of what they represent.
The current Ratio is a figure that reflects the ability of a business to meet its short-term liquidity demands. The formula for the Current Ratio is :
Current Ratio = Current Assets / Current Liabilities
The quick ratio determines the ability of the business to meet its immediate cash needs. It only takes cash and such of those assets into account that can be immediately converted into cash. Usually, for calculating Quick Assets, Inventory is removed from Current Assets.
Interest Coverage Ratio:
The interest Coverage Ratio indicates the company’s ability to meet its interest obligations comfortably. A company's interest coverage ratio determines whether it can pay off its debts.
The ratio is calculated by dividing EBIT (Earnings Before Interest and Taxes) by the company's interest expense.
Debt Equity Ratio:
Banks and lending institutions use this as one of the most important ratios to assess how much a company is leveraging its operations using debt compared to equity.
Gross Profit Sales Percentage:
The gross Profit Sales Percentage is a clear indicator of the fundamental viability of the company. It shows how much surplus is available to meet all other expenses.
Net profit Sales Percentage:
All stakeholders consider this essential ratio for a business loan. This reflects the final financial health of a business as it shows the net profit available after all expenses have been fully met.
Return on Capital Employed:
This is important for everyone, especially investors. This indicates how productively your capital has been employed. The higher the figure, the better it is.
Every entrepreneur, at some point in time or the other, will face the need for additional funds. The most crucial factor for a bank to consider a loan is the Project Report for loan application. The project report format for bank loans for new businesses will be somewhat different from running businesses. Care should be taken that the right format is used.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.