When a lender reviews your loan application, the key question is simple: can this business repay the loan comfortably? Your financial model is where you answer it.
What lenders look for
1. Realistic revenue
Sales should match your capacity, market, and track record. Lenders usually expect a gradual ramp-up, not full capacity from day one.
2. Complete costs
Raw materials, wages, power, rent, maintenance, interest, and depreciation.
3. Repayment capacity: DSCR
The Debt Service Coverage Ratio shows how many times your cash earnings cover your loan payments.
DSCR = (Net profit + Depreciation + Interest) ÷ (Interest + Principal repayment)
Numbers in this example are illustrative.
- Net profit (year 2): ₹18 lakh
- Depreciation: ₹8 lakh
- Interest: ₹10 lakh
- Principal repayment: ₹15 lakh
DSCR = (₹18 + ₹8 + ₹10) ÷ (₹10 + ₹15) = ₹36 lakh ÷ ₹25 lakh = 1.44
Lenders generally want this comfortably above 1. Many look for a minimum somewhere around 1.25 or higher, though thresholds vary by lender and loan type.
4. Break-even point
The level of sales at which you cover all costs. A lower break-even means less risk.
5. Working capital needs
How much cash is tied up in raw materials, finished stock, and customer credit.
6. Sensitivity analysis
What happens if sales fall 10-20% or raw material costs rise? Showing this builds lender confidence.
Tips for a stronger model
- Use conservative assumptions, and explain each one.
- Ramp up capacity use gradually over the first few years.
- Match repayment timing to when the project actually earns.
- Link all statements, so profit, cash, and the balance sheet agree.
- Keep supporting documents ready: quotations, past financials, and orders.
FAQs
What if my DSCR is too low?
Consider a longer repayment period, a higher promoter contribution, or a smaller loan.
How many years should the projections cover?
Typically the full loan tenure, often five to seven years or more, depending on the loan.
Do lenders check my past financials too?
Yes, for existing businesses, past performance is a key part of the assessment.
Applying for a business loan? The Financial Arc builds lender-ready financial models for MSMEs.
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