How to prepare Bank Loan project report

Project Report for Bank Loan:

1. Basic Information required: 

• What is the nature of Business: Manufacturing, Trading, Service, Professional  

• What is the Constitution of Business: Proprietorship, Partnership Firm, Pvt. Ltd. Co. Public Ltd. Co, Trust etc. 

• Existence: Whether the business is already existing or new. Depending upon the above parameters, project reports vary. Depending upon the nature of business, the requirements differ, depending upon constitution of business the Tax related issues differ and depending upon existence of the business, the projections differ. In case of existing business the projections can be prepared on the basis of past data, in case of new business such information is not readily available and projections are to be made by collecting relevant data from the prospective entrepreneur and also from the financial statements of similar business operating in the area. In case of new units, the projections are to be supported with proper data and the presumptions on which the projections are made.
• Requirement: Requirement of any business are of two types : Capital Cost and Working capital. Capital cost includes creation of additional “Fixed Assets” i.e. Building, Machinery, Furniture, Vehicle etc. Working Capital is funds required for efficiently running any business. Generally for capital cost Banks sanction Term Loan which is repayable in installments. Working capital requirement is provided by Banks by way of Cash Credit or Overdraft facility with sub limits for Bills Discounting. Cash Credit / Overdraft / Bill discounting facilities are sanctioned for a period of one year subject to renew every year depending upon past performance. Besides this, Banks also sanction Non Fund based Limits for Bank Guarantees and Letters of Credit under which limits are fixed and these are considered as Contingent Liabilities in Banks books.

3. Project Cost: Once the above basic information is collected next step is to arrive at the Project cost. Project Cost in case of existing business is the “Additional Cost” required for expansion of the business e.g. purchase of additional Machinery, Construction of shed / building etc. In case of new business it is the “Total cost” required to start the new business. Ex:

Total of all such items represent the Project Cost.

4. Sources of Funds: For incurring above expenditure, funds are to be raised through various sources. First is “Capital”e own funds, Second is “Unsecured Loans” raised from Directors of the Company or from Friends & Relatives of the Proprietor / Partners and third is “Bank Loan” which is the amount for which loan is to be requested from Bank. Generally, Banks finance maximum 75% of the “actual cost” required, remaining amount is to be contributed by the applicant through first two methods out of which capital must be more than unsecured loan. The unsecured loans raised by the applicant should not be immediately repayable for which undertaking has to be submitted stating that, the unsecured loans raised shall not be repaid during the currency of Bank Loan. This can be treated as Quasi Equity i.e. part of borrower’s contribution. On finalizing the available sources of funds, the loan amount requirement from Bank can be finalized.  In case of Working capital requirement it depends upon the Current Assets and Current Liabilities of the business / business cycle etc.

5. Requirement of other information / documents:

• Xerox copies of all the required permissions / licenses / registrations e.g. Company / Partnership Firm / Trust registration i.e. identity of the business, Registration under Shops & Establishments Act, SSI Registration or any other registration as per applicable rules in the respective states. License from Foods & Drugs Deptt. In case of eatable items, license related to explosives, license from Pollution Control Board etc. Approved Map and construction permission in case of construction of building / shed. GST registration, PAN card
• Quotations for the items to be purchased preferably from the actual dealer from whom the items are to be purchased. As far as possible, there should not be much variations in quotations submitted to Bank and dealers from whom the items are purchased.
• Income tax returns of the persons / business for last 3 years.
• Bank statements from existing bankers, with details of repayment schedule in case of existing loans if any.
• Details of Collateral Security proposed to be offered with approximate value.
• List of prospective customers and arrangements for selling.
• List of prospective sellers from whom raw material / items will be purchased.
• Information regarding availability of raw materials / items proposed to be dealt with Govt. restrictions if any particularly in case of imported material.
• Market study report and strategy to be adopted for achieving the projected levels particularly in case of new business.
• Assets / Liabilities statements of persons who are going to execute the documents.
• List of assets available / already purchased with copies of invoices.
• Availability of infrastructure i.e. Labour, Water, Electricity, transportation with details of requirement and sources.
• Average period of getting Credit for raw material and minimum economic quantity of purchase, average period of realizing sale proceeds.
• Detailed manufacturing process in case of Manufacturing industry and time taken for completion of one production cycle.
• Minimum period of keeping stock of raw material and finished goods.

6. Detailed Project Report: This is in two parts one is brief write up and second is financial data (CMA Report) CMA stands for Credit Monitoring Arrangement wherein the past and projected financial performance of a business is compiled in a defined format with all the required financial metrics and ratios to help Bankers and Financial Analysts ascertain the financial health of a business.

 In the first part following points are to be covered:  (This is should be in brief covering all the important points: e.g.

• Brief introduction of the business entity – constitution, activity of the business, name(s) of Proprietor, Partners, Directors, Trustees with their designations and their role in the business, Location / Address of the Regd. Office, working place and outlets where activities of the business will be carried out with name of contact persons and contact numbers.
• Experience / Qualifications and capabilities of the owners and other related persons with their relations with the business.
• Nature of Activity and its marketability.
• Availability of Infrastructure like labour, water, electricity, transportation, raw material and present status.
• Detailed information regarding various registrations, permissions, licenses with present status and expected time of completion in case of incomplete items.
• Manufacturing process in brief in case of manufacturing units.
• Time required for completion of the project and starting commercial production / income generation.
• List of existing Debtors / Creditors in case of existing business and prospective clients / consumers in case of new business.
• SWOT analysis of the business.
• Marketing arrangements.
• Details of Project cost and existing assets with sources of finance.
• Present Banking arrangements with details of Accounts maintained.
• Details of any other services which the unit can avail from the Bank e.g. Staff accounts for salary, personal loans for staff guaranteed by the unit etc.
• Financial requirement from Bank with purpose.
• Security proposed to be offered for the loan applied with full details and approximate value.
• Repayment proposed by the applicant based on the CMA data with proposed moratorium period.
• Any other relevant information may be included depending upon the business at appropriate place in this report.
• Request for facility wise sanction of loan..
• Attach list of documents submitted along with the proposal.

Second part consists of CMA data: In CMA data there are different parts:

In case of existing units, the data should be for current year (estimated) and past 3 years (Audited) and projections for next 5 to 7 years covering the proposed repayment period of Term loan.

• Operating statement – Profitability statement. In CMA data the expenses are mainly grouped into following categories:
• Raw Material consumed. (Opening stock + Purchases – Closing Stock)
• Other Spares
• Electricity / Power / Fuel
• Factory / Direct wages
• Repairs & Maintenance
• Other overheads

Total of the above expenses plus opening stock of Stock in process and Finished goods Less closing stock of Stock in process and Finished goods is the “Total Cost of Sales”.

 All other office expenses and indirect expenses related to business excluding Interest paid on Bank loan (which is shown separately- for Cash Credit and for Term Loan) are clubbed under the head “ Selling, General &Administrative Expenses”.

 Non operating Income and Expenses are to be shown separately in the CMA data. Detailed format of “Operating Statement” generally required by Banks for CMA data is attached for reference.

• Balance Sheet – Liabilities: Include following heads

 Current Liabilities:

• Short Term borrowings from “Banks” with sub limit for Bills Discounting.
• Short Term borrowings from “others”.
• Sundry Creditors (Trade)
• Sundry Creditors (Capital Expenditure)
• Advance payment from Customers, dealers.
• Provision for taxation.
• Dividend payable in case of Companies.
• Other Statutory liabilities payable within one year.
• Term Loan installments payable within one year are to be treated as Current Liabilities.
• Other Current Liabilities and provisions to be specified.
• Term Liabilities:
• Part of Term Loan excluding amount payable within one year.
• Other Term liabilities (Not payable within next one year.)
• Unsecured Loans not repayable in next one year.

 Total of Current Liabilities and Term Liabilities represent “Total Outside Liabilities”.

 Net Worth: It includes: 

• Capital invested in the business.
• Reserves & Surplus in case of Companies
• Surplus / Deficit in Profit & Loss Account.

Sum of Current Liabilities, Term Liabilities and Net Worth is “Total Liabilities”

Balance Sheet : Assets:  includes following heads.

• Current Assets: 

• Cash & Bank Balances excluding Term Deposits in Banks
• Investments in Govt. Securities
• Investment in Bank Deposits
• Receivables
• Expenses receivable including Bills purchased and discounted by Banks.
• Inventory which includes Stock of Raw Material, Spares, Stock in Process and Finished Goods.
• Advance to suppliers for supply of Raw Materials and Spares.
• Advance payment of Taxes
• Other Current assets to be specified.

Sum of the above items represent “Total Current Assets”

 Fixed Assets: 

• Gross Block of Fixed Assets Less Depreciation up to date i.e Net Block. (With detailed working of Depreciation)
• Advance for Capital Expenditure
• Other investments which are not “Current Assets”
• Investments in Associates & Subsidiaries.
• Long term loans & advances
• Security Deposits.
• Staff advances
• Obsolete Stock
• Other non-current assets to be specified.
• Preliminary Expenses to the extent of Not written off and other intangible assets.

Sum of Current Assets and Fixed Assets is “Total Assets”

Total Liabilities = Total Assets (to be checked)

Ratio Analysis & Assessment of Bank Finance:

 From the available and projected financial statements, important ratios are to be calculated which include :

• Cash Flow statement.
• Sensitivity analysis

Working Capital assessment:

 Term loan component depends upon the “Project Cost”, but Assessment of Working Capital i.e. Cash Credit / Overdraft limit depends upon various parameters and calculated based on various methods of assessment of Working Capital, which is mainly related to Current Assets and Current Liabilities. It is outcome of two variables:

• The Volume of Activity : Production and Sales
• Required level of Current Assets (Inventory and Receivables) to enable the unit to carry on operations smoothly.

Sources of Working Capital include:

• Own Funds
• Bank Borrowings
• Sundry Creditors
• Advances from Customers
• Deposits due in one year
• Other Current Liabilities

Following are various methods of assessment of Working Capital:

• Operating Cycle Method
• Traditional Method
• Projected Balance Sheet Method
• Cash Budget Method
• Projected Annual Turnover Method (Nayak Committee)

 Operating Cycle Method:

 Time taken between cash outlay (investment) and cash realization through sale of finished goods and realization of receivables is known as “Operating Cycle”

 For Example:

Time taken for different activities is as under:

• Stock of Raw Material in days 60
• Stock in Process in days 10
• Stock of Finished Goods in days 20
• Bills Receivable in days 30

Length of Operating Cycle                               120 Days

 (i.e. 3 Cycles in a year (365/120)

 Measuring Period for Working Capital components:

• Raw Material holding period = Stock of R.M. *365 / Annual consumption of Raw Material.
• Stock in Process holding period = Stock in Process * 365 / Cost of Production.
• Finished Goods holding period = Finished Goods level * 365 / Cost of Sales.
• Receivables holding period = Receivables * 365 / Annual Gross Sales
• Advances paid to suppliers period = Advances paid * 365 / Annual purchases.
• Trade Creditors holding period = Trade Creditors level * 365 / Annual purchases.
• Advances received against Sales period = Advances received * 365 / Annual Gross sales.

If Sales of the business are Rs. 2,00,000.00 and operating Expenses are Rs. 1,80,000.00, then the Working Capital required will be Rs. 60,000.00.

 (1,80,000 / 3 – Number of cycles in a year)

    As per this method Working Capital required is influenced by two factors:

• Level of Operating Expenses
• Length of Operating Cycle.

Reduction in either will bring down Working Capital Requirement which indicates improved efficiency in Working Capital Management.

1. Traditional Method:

For example:  for unit XYZ:                      (Amount in lakhs)

Anticipated Monthly Sales                                     Rs. 200.00

Cost of Raw Material per month                            Rs.  150.00

Cost of Production per month                               Rs.  190.00

If Liquid surplus in Balance Sheet at the end of last year =  50, Net Deficit = 410 (b)  (460 Minus 50). 

Eligible Working Capital limit under traditional method minimum of a & b = 389  say 390

1. Projected Balance Sheet Method:

• Proper Examination of Performance:

• Profitability
• Financial Position
• Financial Management.

• Scrutiny & Validation of Projections:

• Income & Expenses
• Changes in Financial Positions.

• Acceptability of Liquidity, overall gearing efficiency of operations:

Assessment of Working Capital under Projected Balance Sheet Method:

                                                                                                (Amt in lakhs)

 If

1. Cash Budget Method: This is applicable in case of Seasonal and specific industries: e.g. Sugar Industry, Ginning & Pressing, Construction activity, Information & Technology etc.

Cash Flow Statement:  Example

Limit is decided based on peak deficit projected as per Cash Flow Statement.

1. Projected Turnover Method (Nayak Committee):

This method is applicable where FBWC limit is upto Rs. 500.00 lakh (Rs. 5.00 Crore)

Under this method Working Capital is decided as 25% of Realistic Projected Annual Turnover Less Min. 5% of turnover to be brought in by the borrowers as their contribution.

Computation under annual Turnover method.

1. Annual Turnover as projected by Borrower
2. Turnover as accepted by Bank
3. Working Capital Requirement (25% of B)
4. Minimum margin required (5% of B)
5. Actual Margin available (CA – CL)
6. Item C – item D
7. Item C – item E
8. WC Finance – F or G, whichever is less

Example:

                                                                             (Amt. in lakhs)

Non Fund based limits e.g. Letters of Credit or Bank Guarantees : Limits are to be decided based upon genuine requirement of the unit.

Format of CMA Data:  Banks use individual formats of CMA data, however the information required is same.  One of the formats is given below:  The format may be prepared in excel sheet for easy calculations.

Operating Statement:

NOTE:

All information in this post are for educational purpose only, some table format are not arranged