Why Banks Reject Business Plans
Having worked with 500+ entrepreneurs on their business plans, we have identified the top reasons banks reject loan applications:
- Inadequate financial projections (42% of rejections) - Missing DSCR, unrealistic revenue assumptions
- Incomplete documentation (28%) - Missing forms, outdated information, gaps in data
- Poor credit history (15%) - Low CIBIL score, existing defaults
- Weak business viability (10%) - Insufficient market analysis, no competitive advantage
- Formatting issues (5%) - Unprofessional presentation, missing sections
The good news: 70% of these rejection reasons are preventable with a properly prepared business plan.
What Banks Actually Evaluate
The 5 C's of Credit Assessment
Banks evaluate every loan application using these five criteria:
| Factor | What Banks Check | How Your Business Plan Helps |
|---|---|---|
| Character | CIBIL score, repayment history, references | Promoter background, track record |
| Capacity | Ability to repay from cash flows | DSCR, cash flow projections, P&L |
| Capital | Promoter's own investment (skin in the game) | Means of finance, equity contribution |
| Collateral | Assets to secure the loan | Asset list, valuation certificates |
| Conditions | Industry outlook, economic environment | Market analysis, industry trends |
DSCR: The Most Important Number for Bank Loans
The Debt Service Coverage Ratio is the single most important metric banks evaluate.
Formula: DSCR = Net Operating Income / Total Debt Service
What Banks Want:
- •DSCR of 1.5x or above for term loans
- •DSCR of 1.25x minimum for MUDRA loans
- •Projected DSCR for all 5 years of the loan term
Example Calculation:
| Year | Net Operating Income | Annual Debt Service | DSCR |
|---|---|---|---|
| Year 1 | Rs.12,00,000 | Rs.6,00,000 | 2.00x |
| Year 2 | Rs.18,00,000 | Rs.6,00,000 | 3.00x |
| Year 3 | Rs.24,00,000 | Rs.6,00,000 | 4.00x |
At Setup India, our CA team ensures your DSCR calculations are accurate, defensible, and presented in the format banks expect.
Loan-Specific Business Plan Requirements
MUDRA Loan (Up to Rs.10 Lakh)
MUDRA loans under PMMY (Pradhan Mantri Mudra Yojana) have three categories:
| Category | Loan Amount | Business Plan Requirement |
|---|---|---|
| Shishu | Up to Rs.50,000 | Basic project report (10-15 pages) |
| Kishore | Rs.50,001 - Rs.5,00,000 | Detailed project report (20-30 pages) |
| Tarun | Rs.5,00,001 - Rs.10,00,000 | Comprehensive business plan (30-40 pages) |
Key Sections Required:
- •Detailed cost of project
- •Means of finance (your contribution + loan amount)
- •Revenue projections with assumptions
- •Working capital requirements
- •Promoter background and experience
MSME Term Loans (Rs.10 Lakh - Rs.5 Crore)
Required Sections:
- •Detailed Project Report (DPR) with technical specifications
- •Market analysis and demand-supply study
- •5-year financial projections with DSCR
- •CMA data (Current year estimates + 3 year projections)
- •Means of finance with debt-equity ratio
- •Collateral details and asset valuation
- •Break-even analysis
- •Sensitivity analysis
CGTMSE Loans (Collateral-Free up to Rs.5 Crore)
The Credit Guarantee Fund Trust for MSEs covers collateral-free loans. The business plan must be exceptionally strong since there is no asset backing.
Additional Requirements:
- •Stronger DSCR (1.5x minimum)
- •Detailed risk analysis
- •Clear promoter capability evidence
- •Robust market demand validation
- •Proven business model or pilot results
Business Plan Format for Bank Loans
Cover Page
- •Business name, promoter name, loan type, amount requested
- •Contact details, date of preparation
- •Professional formatting (Setup India branding optional)
Section 1: Promoter Profile (3-4 pages)
- •Education and qualifications
- •Professional experience (especially in the proposed sector)
- •CIBIL score declaration
- •Net worth statement
- •Existing business experience (if any)
Section 2: Business Overview (4-5 pages)
- •Nature of business
- •Products/services description
- •Location and premises details
- •Technology and equipment required
- •Licenses and registrations
Section 3: Market Analysis (5-7 pages)
- •Industry overview with growth data
- •Target market identification
- •Customer profile and demand analysis
- •Competition analysis
- •Marketing and sales strategy
Section 4: Financial Projections (10-15 pages)
This is the most critical section for bank approval.
Must Include:
- •Project cost breakdown
- •Means of finance
- •Revenue projections (5 years)
- •Monthly P&L for Year 1
- •Annual P&L for Years 2-5
- •Cash flow projections
- •Balance sheet projections
- •DSCR calculations for each year
- •Break-even analysis
- •Working capital assessment
- •CMA data format (if required)
Section 5: Repayment Schedule (2-3 pages)
- •Proposed EMI structure
- •Moratorium period justification
- •Source of repayment
- •Contingency plan if revenue falls short
Documents Checklist for Bank Loan Application
| Document | Required For |
|---|---|
| Business plan / DPR | All loans |
| PAN card of promoter | All loans |
| Aadhaar card | All loans |
| Address proof | All loans |
| CIBIL report | All loans |
| ITR (last 2-3 years) | Term loans, CGTMSE |
| Bank statements (12 months) | All loans |
| Business registration certificate | All loans |
| GST registration (if applicable) | Term loans |
| Quotations for machinery/equipment | Project-based loans |
| Property documents (for collateral) | Secured loans |
| Partnership deed / MOA-AOA | As applicable |
Bank-Wise Business Plan Preferences
Different banks have slightly different expectations:
| Bank | Preferred Format | Key Focus Areas |
|---|---|---|
| SBI | Standard DPR format | DSCR, collateral, industry outlook |
| PNB | CMA data emphasis | Working capital, credit rating |
| HDFC | Structured business plan | Market analysis, management team |
| ICICI | Detailed financials | Unit economics, growth trajectory |
| Bank of Baroda | Government scheme format | Social impact, employment generation |
Tips for Bank Loan Business Plan Approval
- Be conservative in projections: Banks prefer realistic growth over ambitious targets
- Show promoter contribution: Typically 25-33% of project cost should be self-funded
- Include collateral details: Even for CGTMSE, show what assets you have
- Get CA certification: Business plans prepared/certified by CAs carry more weight
- Format professionally: Banks see hundreds of applications - yours must stand out
- Include industry benchmarks: Show your projections align with industry averages
- Address risks proactively: Show you have thought about what could go wrong
- Keep assumptions transparent: Document every assumption in your financial model
Conclusion
Bank loan approval depends heavily on the quality of your business plan. A professionally prepared, CA-certified business plan with accurate DSCR calculations and realistic projections dramatically increases your approval chances.
Setup India's CA team has helped 500+ entrepreneurs secure bank loans with a 100% approval record for properly documented applications. Plans start at Rs.9,999 with 5-7 day delivery.