projections for bank loans purposes

[Sundaraiah kollipara]

sir,

A Small business person rs:10 lacs bank cc loan required but bank manager two years balance sheet and profit and loss projections asked for loan purposes.

Question: two years how much sale turnover and capital showing for bank loan purposes and loan calculted procedure.

[YAGAY andSUN]

For a Rs. 10 lakh Cash Credit (CC) loan, banks mainly evaluate the last 2 years' Balance Sheet and Profit & Loss (P&L) to check the business's turnover, profit, and capital. There is no fixed rule, but banks usually apply common working-capital norms.

1. Turnover Requirement
Many banks use the Turnover Method, where the CC limit is about 20% of annual sales turnover.

Formula:
Eligible CC Limit = 20% x Annual Turnover

Example:

• Desired CC Limit: Rs. 10,00,000

• Required Turnover Rs. 50,00,000 per year

So, showing Rs. 45-60 lakh annual sales generally supports a Rs. 10 lakh CC request.

2. Profit Level (P&L)
Banks check that the business earns reasonable profit. A typical small-business margin is 8-15% net profit.

Example:

• Annual Sales: Rs. 50,00,000

• Expenses: Rs. 44,00,000

• Net Profit: Rs. 6,00,000 (around 12%)

Consistent profit for two years strengthens the loan application.

3. Owner's Capital (Net Worth)
Banks expect the owner to invest their own funds. Usually 25-30% of the working capital should come from the owner.

Example Balance Sheet (simplified):

• Owner Capital: Rs. 8,00,000

• Bank CC Loan: Rs. 10,00,000

• Total Funds: Rs. 18,00,000

Assets side may include:

• Stock: Rs. 9,00,000

• Debtors: Rs. 6,00,000

• Cash/Other Assets: Rs. 3,00,000

4. Stock Method / Drawing Power
For CC accounts, banks often calculate limits based on stock and receivables.

Example:

• Stock: Rs. 10,00,000

• Debtors: Rs. 5,00,000

• Total Current Assets: Rs. 15,00,000

• Bank Margin: 25%

Eligible limit = Rs. 15,00,000 x 75% = Rs. 11,25,000
So the bank may sanction about Rs. 10 lakh CC.

5. Example of Two-Year Financials for Rs. 10 Lakh CC

Year 1:

• Sales: Rs. 48,00,000

• Net Profit: Rs. 4,80,000

Year 2:

• Sales: Rs. 55,00,000

• Net Profit: Rs. 6,00,000

Owner Capital: around Rs. 7-9 lakh.

Common documents required:

• 2 years Balance Sheet & P&L

• Income Tax Returns (ITR)

• GST returns or sales proof

• 6-12 months bank statement

• Stock statement

• KYC documents

In practice, showing Rs. 50-60 lakh turnover, about 10% profit, and Rs. 7-8 lakh capital generally supports a Rs. 10 lakh CC loan proposal.

AI Summary

Turnover-based eligibility for cash credit: demonstrate sufficient annual sales, stable profits and owner capital to secure limits. Banks grant Cash Credit limits based on two years' Balance Sheets and P&L, commonly applying a Turnover Method (CC 20% of annual sales), requiring turnover near fifty-sixty lakh for a ten lakh CC, sustained net profit margins (circa 8-15%), and owner capital contribution of about 25-30% of working capital; alternatively banks compute drawing power from stock and receivables after prescribed bank margins. Required documents include two years' financials, ITR, GST/sales proofs, recent bank statements, stock statements and KYC.