Credit Diagnostic - Understand your financial position before approaching a Bank
Published on: May 9th, 2018

billionloans Credit Team

Are you an MSME? Have you ever applied for a loan and faced rejection? Insufficient collateral cover, financials not up to the mark, poor credit scores are common answers given by bankers while rejecting a credit application. In some cases, you are left wondering why the application got rejected. In our experience, we have noticed that in most cases, applicants are not familiar with banks’ criteria for approving loans. On many occasions companies have not been able to justify their loan requirements due to lack of professional guidance.

This makes the use of pre-credit diagnostic before approaching a bank highly relevant. Awareness of the lender’s criteria and precise credit terms such as loan amount, ratios, collateral, etc. vis-a-vis an entity’s business model is important. Though various measures have been taken up to engage MSMEs in mainstream banking, awareness about their own financial standing needs to be encouraged.


A credit diagnostic involves awareness of commercial credit scores and rationale, financial ratios from banker’s perspective and ways to improve the same. The balance sheet needs to be analysed to understand the sources of funds for working capital and long-term capital (fixed assets) separately. A mix of own capital, credit facilities and creditors need to be deployed in the right proportion. From the working capital perspective, maintaining appropriate level of liquidity is significant vis-a-vis industry and estimated turnover.

As far as the profit and loss account goes, understanding your cash profit, EBITDA and gross profit is the key. While the balance sheet helps one to understand the quantum of loan required for various purposes, the profit and loss account helps to understand ability to repay the debt. Understanding these simple points and improving the financials in the long run will not only help the applicant find the right product, it will also help in communicating properly with bankers and credit scoring agencies. This will help the entity to raise right quantum of debt at cheaper cost with appropriate terms and lower collateral.

One also needs to understand and explain the business model in depth to identify funding requirements for different purposes and to ensure that returns are sufficient to justify the funds deployed. For e.g. one needs to find answers to questions like:

  • Is there any stage in the work capital cycle that sucks up liquidity?
  • Whether large customers are only contributing to the top-line or are they making meaningful contributions to the bottom-line?
  • Whether the procurement model is better than competitors or vice versa?

It is important to note that even a large top line can cause concern if it is not contributing sufficiently to the bottom line, thereby building risks for a business entity. Knowing your credit profile and addressing credit issues before approaching a banker is as important as making the application itself. We at billionloans help MSME borrowers understand their own credit profile and provide advisory services to address various credit issues. The process starts simply by knowing your own commercial credit score.