Lending & Credit Glossary for MSMEs

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Glossary

Plain-English definitions of the lending and credit terms Indian businesses run into most often, cross-linked to the articles and offerings where they come up.

A

Assessed Working Capital

The amount of working capital finance a bank or NBFC agrees to sanction after studying the borrower's CMA data, operating cycle and past conduct of the account, rather than simply what the borrower has asked for. It is usually derived using a method such as MPBF or a turnover-based formula, then adjusted for the lender's own view of the risk in the account. The assessed figure becomes the basis for the cash credit or working capital limit set out in the sanction letter.

Why it matters: Knowing how assessment works helps a borrower present numbers that support the limit they actually need, rather than being surprised by a lower sanction.

Explained further in: Working capital limit mistakes: a renewal and utilisation checklist, CMA data explained: what your bank actually reads, How banks assess your working capital requirement

Audited Financials

A company's profit and loss account, balance sheet and cash flow statement that have been examined and signed off by an independent chartered accountant, as distinct from figures the business has simply drawn up itself. Lenders and investors treat audited financials as the most reliable record of past performance because the auditor has verified supporting documents and disclosed any qualifications. Most credit proposals need two to three years of audited financials alongside the latest provisional figures.

Why it matters: Clean, timely audited financials are often the single biggest factor in how quickly a lender trusts a proposal.

Explained further in: The First Ninety Days of SME IPO Preparation: A Practical Plan, Credit Readiness Checklist: What to Fix Before You Apply, How to Check Your Business's Credit Readiness Before Applying, How to Prepare Your Company for an Acquisition Offer, Request a Rating Review Now or Wait? How to Decide, Self-Review or Independent Financial Review: Which Fits?, SME IPO Process Step by Step: From Board Decision to Listing, SME IPO Readiness Checklist: Red Flags That Delay a Listing, Who should prepare your project report: you, a CA or a consultant?, How an MSME should prepare before raising debt, Improving your external credit rating: what actually moves it, Preparing for an SME IPO: the readiness work that comes first, The documents you need for a business loan, The due diligence checklist every promoter should run first

B

Balloon Repayment

A term loan structure in which the regular instalments are smaller than a standard equal-instalment schedule, with a large final payment, the balloon, due at the end of the tenure. It is used where the borrower expects a lump sum inflow later, such as a project reaching full capacity or an asset being sold. Lenders assess balloon structures carefully because the borrower's ability to pay the final amount depends on assumptions that may not hold.

Why it matters: A borrower agreeing to a balloon structure should have a realistic, documented plan for the final lump sum, not just an expectation that revenue will rise.

Explained further in: Tenure Extension, Moratorium or Rate Cut: Which Restructuring Fits?, Restructuring or settlement: choosing a path for a stressed account, Term loan or working capital? Matching the facility to the need

Bank Guarantee (BG)

A written undertaking from a bank that it will pay a specified sum to a beneficiary if the borrower's client fails to perform a contractual obligation, such as completing a project or honouring a payment. Bank guarantees are common in construction, government tenders and large supply contracts, and are typically issued as performance guarantees or financial guarantees. Issuing a BG uses up a limit within the borrower's overall sanctioned facilities and usually requires margin money.

Why it matters: A business bidding for tenders or large contracts needs to plan its BG limit well in advance, since it is a separate facility from cash credit or term loans.

Explained further in: Letters of credit and bank guarantees, explained

Bill Discounting

A short-term financing method where a business sells its trade bills to a bank or NBFC at a discount before their due date, receiving immediate funds instead of waiting for the buyer to pay. The financier collects the full amount from the buyer on the due date and keeps the discount as its return. It is a common way for sellers to convert receivables into cash without waiting out the full credit period given to buyers.

Why it matters: Bill discounting can free up cash tied up in receivables without adding a new long-term loan to the balance sheet.

Explained further in: Cross-Border Trade Finance and Logistics: A Complete Guide, Cash credit, overdraft or bill discounting: which one fits you?, Export document mistakes that delay payment, and a checklist, Letter of credit or open account: choosing export payment terms, Export finance options for Indian exporters, Letters of credit and bank guarantees, explained

C

Cash Credit

A revolving working capital facility that lets a business draw funds up to a sanctioned limit, secured mainly by stock and receivables through hypothecation, with interest charged only on the amount actually drawn. The drawable amount within the limit is governed by drawing power, calculated from the latest stock statement. Cash credit is renewed periodically, usually annually, subject to a fresh review of the account.

Why it matters: Because interest is charged only on what is drawn, keeping the account well managed and stock statements current directly affects the cost of working capital.

Explained further in: Working Capital Finance Myths: How Bank Limits Really Work, Cash credit, overdraft or bill discounting: which one fits you?, How to apply for a business loan: a step-by-step guide for MSMEs, How to apply for a cash credit limit: a step-by-step guide, Drawing power and stock statements, without the confusion, Early warning signs your loan account is under stress, Term loan or working capital? Matching the facility to the need

CGTMSE(Credit Guarantee Fund Trust for Micro and Small Enterprises)

A government-backed guarantee scheme that allows banks and NBFCs to extend collateral-free loans to eligible micro and small enterprises, with the scheme trust covering a portion of the lender's loss if the borrower defaults. It does not guarantee that a loan will be sanctioned or on what terms; it simply reduces the lender's need for collateral. Coverage limits, cover percentages and fees are revised periodically by the trust, so current details should be checked with the lender or the scheme's latest guidelines.

Why it matters: A smaller business without much collateral can use CGTMSE-backed lending to access credit that would otherwise need a large amount of security.

Explained further in: Bank or NBFC: how to decide where to borrow, MSME credit guarantee schemes: how they work, Personal guarantees and collateral: what you are really signing

CMA Data(Credit Monitoring Arrangement)

A structured set of financial statements, past, current and projected, that a business prepares in a standard format for a bank or NBFC when applying for credit or renewal of limits. It typically includes operating statements, balance sheets, a fund flow statement and working capital assessment worksheets for several years, both actual and projected. Lenders use CMA data as the core document to assess working capital gap, ratios and repayment capacity.

Why it matters: Well-prepared CMA data, consistent with audited financials and GST returns, speeds up assessment and reduces queries from the lender's credit team.

Explained further in: What Happens to Your Project Report After You Submit It, Debt raise mistakes to avoid and a lender-readiness checklist, How to apply for a cash credit limit: a step-by-step guide, How to build projected financials for a bank loan proposal, Who should prepare your project report: you, a CA or a consultant?, Why banks send project reports back: common mistakes and fixes, CMA data explained: what your bank actually reads, How an MSME should prepare before raising debt, How banks assess your working capital requirement, How banks rate borrowers internally, and why it affects your pricing, Preparing a detailed project report lenders trust, The documents you need for a business loan, What lenders look for in a credit proposal

Co-Lending

An arrangement where a bank and an NBFC jointly fund a loan to a borrower under a pre-agreed structure, typically with the bank providing the larger share of funds and the NBFC originating and servicing the loan using its reach and underwriting. From the borrower's perspective, the loan may be disbursed and serviced by the NBFC even though part of the funding sits on the bank's books. Terms, pricing and the split between the two lenders vary by arrangement.

Why it matters: A borrower dealing with an NBFC under a co-lending arrangement should understand which entity to approach for servicing queries versus which one holds the larger exposure.

Explained further in: Bank or NBFC: how to decide where to borrow

Collateral Security

Additional security offered to a lender beyond the primary security created from the assets financed by the loan, such as a mortgage on property, a fixed deposit, or a pledge of other assets. Lenders ask for collateral when the primary security alone does not adequately cover the loan amount or the perceived risk. The extent of collateral required varies by lender, loan type and the borrower's credit profile, and is not fixed by regulation.

Why it matters: Understanding what a lender is asking for as collateral versus primary security helps a borrower negotiate and compare offers from different lenders.

Explained further in: After an NPA Settlement: Closing the Account and Rebuilding Credit, Loan against property myths, and how it really works, Raising capital and credit for an Indian business: the complete guide, The life of a business loan: from first instalment to closure, Business loan offer checklist: fees, covenants and clauses to check, How to get a loan against property: the process, step by step, Loan against property or unsecured business loan: how to choose, Project finance or a regular term loan for your expansion?, Secured or unsecured business loan: which is right for you?, Senior debt, mezzanine or venture debt: which fits your business?, What to Do When Your Loan Account Becomes an NPA, MSME credit guarantee schemes: how they work, One-time settlement: a borrower's playbook, Personal guarantees and collateral: what you are really signing, Received a SARFAESI notice? The first steps to take, What lenders look for in a credit proposal

Commercial Credit Report

A report compiled by a credit information company that records a business's borrowing history, repayment conduct, current outstanding facilities and any defaults or write-offs across lenders. Banks and NBFCs pull this report as part of assessing a credit proposal, alongside the promoters' personal credit reports. Errors or outdated entries in the report can affect a proposal, so businesses are advised to check it periodically.

Why it matters: A business should review its own commercial credit report before applying for a new facility so any inaccuracies can be corrected in advance rather than discovered mid-process.

Explained further in: After an NPA Settlement: Closing the Account and Rebuilding Credit, Credit Rating Myths: What Really Moves an MSME's Rating, What to Do After an Independent Financial Review: A Ninety-Day Plan, Credit Readiness Checklist: What to Fix Before You Apply, Debt raise mistakes to avoid and a lender-readiness checklist, Bank or NBFC: how to decide where to borrow, Reading your commercial credit report, The due diligence checklist every promoter should run first

Consortium Lending

An arrangement where multiple banks jointly finance a single borrower under one common set of terms, security and documentation, usually led by one bank acting as the consortium leader. It is typically used for larger credit requirements that a single bank may not wish to fund alone. All member banks share security on a pari passu basis and generally act together on key decisions about the account.

Why it matters: A borrower under consortium lending needs consistent information and documentation across all member banks, since a delay or discrepancy with one lender can affect the whole consortium.

Explained further in: How banks assess your working capital requirement, Reading your commercial credit report

Corporate Guarantee

A guarantee given by one company, often a group entity or holding company, to a lender, undertaking to repay a borrower's loan if the borrower defaults. It works similarly to a personal guarantee but is given by a corporate entity rather than an individual. Lenders may ask for a corporate guarantee from group companies with stronger financials to support a borrowing entity's proposal.

Why it matters: A group company that gives a corporate guarantee takes on a contingent liability that can affect its own borrowing capacity and should be reflected in its financial disclosures.

Explained further in: Personal guarantees and collateral: what you are really signing

Current Ratio

A liquidity ratio calculated by dividing current assets, such as stock, receivables and cash, by current liabilities, such as creditors and short-term borrowings, used to gauge whether a business can meet its short-term obligations. Lenders look at the current ratio as part of assessing working capital health, often alongside the working capital gap and operating cycle. A ratio comfortably above one is generally seen as healthier, though acceptable levels vary by industry and lender.

Why it matters: Tracking the current ratio over time helps a business spot a build-up of short-term stress before it shows up as a cash shortfall.

Explained further in: How to Build a Credit Rating Improvement Plan, Step by Step, How to Check Your Business's Credit Readiness Before Applying, Why banks send project reports back: common mistakes and fixes, CMA data explained: what your bank actually reads, Early warning signs your loan account is under stress, How banks assess your working capital requirement, How banks rate borrowers internally, and why it affects your pricing, The financial ratios lenders check first

D

Debt-Equity Ratio

A leverage ratio that compares a company's total outside borrowings to its own funds, equity plus reserves, showing how much of the business is financed by debt versus owners' capital. Lenders use it to judge whether a company is over-leveraged relative to its net worth before extending fresh term loans. Acceptable levels vary widely by industry, project type and lender policy, so no single number applies universally.

Why it matters: A promoter planning a large capital-intensive project should model the debt-equity ratio early, since a highly leveraged structure can make lenders cautious regardless of how good the project looks.

Explained further in: What to Do After an Independent Financial Review: A Ninety-Day Plan, Your first ninety days after a debt raise: a practical plan, Senior debt, mezzanine or venture debt: which fits your business?, Equity or debt: choosing the right capital for your stage, How an MSME should prepare before raising debt, Improving your external credit rating: what actually moves it, The financial ratios lenders check first, Valuation basics for business owners

DPR(Detailed Project Report)

A comprehensive document prepared for a new project or major expansion that sets out the technical feasibility, project cost, means of finance, market assessment, implementation schedule and projected financial performance. Lenders rely heavily on the DPR when assessing project finance proposals, since it is the primary basis for judging viability before the project has any operating history. A weak or inconsistent DPR is one of the most common reasons project finance proposals are delayed or declined.

Why it matters: A promoter putting together a first-time project should treat the DPR as the document lenders will scrutinise most closely, not a formality to be completed quickly.

Explained further in: Planning, Approving, Financing and Building a Project, What Happens to Your Project Report After You Submit It, How to Brief an Architect for a Factory, Shop or Office Building, How to plan a plumbing contract for water supply and drainage, Project loan appraisal: common mistakes and a checklist, Separate electrical contractor or turnkey package: which to pick?, Who should prepare your project report: you, a CA or a consultant?, Why banks send project reports back: common mistakes and fixes, Preparing a detailed project report lenders trust, Project finance for first-time promoters

Drawing Power

The maximum amount a borrower can actually draw from a cash credit or overdraft limit at a given time, calculated from the latest stock statement after deducting margin and any unpaid creditors, and capped at the sanctioned limit. Drawing power can be lower than the sanctioned limit if stock or receivable levels have fallen, even though the account itself has not been reduced. Banks recalculate it each time a fresh stock statement is submitted.

Why it matters: A business that lets its stock statements lapse or understates current assets can find its drawing power cut, restricting cash flow even though the sanctioned limit is unchanged.

Explained further in: Working Capital Finance Myths: How Bank Limits Really Work, How to apply for a cash credit limit: a step-by-step guide, Working capital limit mistakes: a renewal and utilisation checklist, Drawing power and stock statements, without the confusion, Early warning signs your loan account is under stress, SMA-0, SMA-1, SMA-2: what each stage means and what to do

DRT(Debt Recovery Tribunal)

A specialised tribunal set up to handle recovery cases filed by banks and financial institutions against defaulting borrowers, generally for larger debt amounts than would go through ordinary civil courts. Lenders can approach the DRT for a recovery certificate that allows enforcement against a borrower's assets. Proceedings before the DRT run alongside, or as an alternative to, action under SARFAESI or the IBC depending on the case. This is general information, not legal advice.

Why it matters: A borrower who receives a DRT notice should treat it as a serious legal step and take advice promptly rather than waiting it out.

Related: SARFAESI, IBC, NPA, OTS

Explained further in: NPA Negotiation Mistakes and a Document Checklist for Borrowers, Received a SARFAESI notice? The first steps to take

DSCR(Debt Service Coverage Ratio)

A ratio that measures how comfortably a business's cash accruals cover its debt obligations, principal repayment plus interest, over a period, usually a year. Lenders use DSCR heavily in term loan and project finance appraisal, since it reflects whether projected cash flow can service the proposed repayment schedule with a reasonable cushion. A DSCR below one means projected cash flow does not fully cover debt obligations for that period, which lenders view as a red flag.

Why it matters: Before finalising a repayment schedule, a borrower should stress-test their own DSCR against a slower sales scenario, not just the base case used in the proposal.

Explained further in: After Commissioning: What Happens During a Project Loan's Life, How to Build a Credit Rating Improvement Plan, Step by Step, How to build projected financials for a bank loan proposal, How to Check Your Business's Credit Readiness Before Applying, How to Request a Loan Restructuring From Your Bank, How to write an information memorandum for a debt raise, Loan against property or unsecured business loan: how to choose, Project finance or a regular term loan for your expansion?, Project loan appraisal: common mistakes and a checklist, Tenure Extension, Moratorium or Rate Cut: Which Restructuring Fits?, Why banks send project reports back: common mistakes and fixes, Early warning signs your loan account is under stress, How banks rate borrowers internally, and why it affects your pricing, Improving your external credit rating: what actually moves it, Preparing a detailed project report lenders trust, Project finance for first-time promoters, Restructuring or settlement: choosing a path for a stressed account, Term loan or working capital? Matching the facility to the need, The financial ratios lenders check first, What lenders look for in a credit proposal

Due Diligence

The structured process of verifying a company's financial, legal, tax and operational position before a transaction such as a fundraise, merger, acquisition or major credit facility. It typically involves review of financial statements, contracts, litigation history, regulatory compliance and title to key assets, often carried out by accountants and lawyers engaged for the purpose. The depth of due diligence scales with the size and complexity of the transaction.

Why it matters: A business that keeps its financial, legal and compliance records organised year-round moves through due diligence far faster when a transaction opportunity arises.

Explained further in: Business Sale Myths: How Selling a Company Really Works, Credit Health, Stressed Accounts and Strategic Deals: A Full Guide, Equity fundraising myths MSME promoters believe, and the reality, Loan against property myths, and how it really works, Raising capital and credit for an Indian business: the complete guide, The First Ninety Days of SME IPO Preparation: A Practical Plan, What Happens After You Submit a Loan Restructuring Request, What Happens to Your Project Report After You Submit It, Business Sale Mistakes and a Term Sheet Checklist for Promoters, Debt raise mistakes to avoid and a lender-readiness checklist, Equity term sheet red flags and a pre-raise checklist, How to Prepare Your Company for an Acquisition Offer, How to run an equity fundraise, step by step, Self-Review or Independent Financial Review: Which Fits?, SME IPO Process Step by Step: From Board Decision to Listing, SME IPO Readiness Checklist: Red Flags That Delay a Listing, Buying or selling a business in India: a practical roadmap, Preparing for an SME IPO: the readiness work that comes first, The due diligence checklist every promoter should run first

E

EBITDA(Earnings Before Interest, Tax, Depreciation and Amortisation)

A measure of a company's core operating profitability, calculated by adding back interest, tax, depreciation and amortisation to net profit. It is widely used by lenders and investors because it strips out financing structure and accounting choices to allow easier comparison between businesses. EBITDA is a key input into interest coverage ratio and debt service coverage ratio calculations.

Why it matters: Tracking EBITDA trends helps a business understand its underlying operating performance separately from how it has chosen to finance itself.

Explained further in: Business Sale Myths: How Selling a Company Really Works, Business Sale Mistakes and a Term Sheet Checklist for Promoters, How to Prepare Your Company for an Acquisition Offer, Buying or selling a business in India: a practical roadmap, The financial ratios lenders check first, Valuation basics for business owners

ECB(External Commercial Borrowing)

A loan raised by an Indian company from a recognised overseas lender, in foreign currency or in rupees, under a regulatory framework set by the Reserve Bank of India that governs eligible borrowers, lenders, end uses and borrowing limits. ECBs are typically used to fund larger capital expenditure, project costs or refinancing of existing foreign currency debt. The applicable limits, cost ceilings and permitted end uses are set out in RBI's ECB guidelines and are revised from time to time.

Why it matters: A company considering an ECB should check the current RBI framework and applicable hedging requirements before assuming it is a cheaper source of funds than domestic debt.

Explained further in: Export finance options for Indian exporters, Managing currency risk as an MSME

Enterprise Valuation

An estimate of the total value of a business, covering both its equity and its debt, typically arrived at using methods such as discounted cash flow, comparable company multiples, or asset-based approaches. Enterprise valuation is used when raising equity, negotiating an M&A transaction, or structuring an SME IPO, and forms the basis for negotiating how much equity a new investor receives. Valuation is inherently an estimate based on assumptions, not a fixed figure.

Why it matters: A promoter should understand which valuation method and assumptions are being used before treating any number as a starting point for negotiation.

Explained further in: Business Sale Myths: How Selling a Company Really Works, Equity fundraising myths MSME promoters believe, and the reality, Business Sale Mistakes and a Term Sheet Checklist for Promoters, Equity term sheet red flags and a pre-raise checklist, How to Prepare Your Company for an Acquisition Offer, How to run an equity fundraise, step by step, Merger, Acquisition or Strategic Sale: Which Route Fits?, Private equity, angel or strategic investor: who should you pick?, SME IPO or Private Equity: Which Growth Route Fits You?, Buying or selling a business in India: a practical roadmap, Equity or debt: choosing the right capital for your stage, Valuation basics for business owners

Equitable Mortgage

A mortgage created by depositing the original title deeds of an immovable property with the lender, along with a memorandum recording the intent to create security, rather than executing and registering a full mortgage deed. It is a commonly used, lower-cost way of securing loans against property in India, available in notified towns. Because it depends on the lender holding the original title documents, the property's title must be clear and undisputed.

Why it matters: A borrower offering property as security should have title documents verified and in order well before applying, since defects here are a common cause of sanction delays.

Explained further in: Loan against property myths, and how it really works, How to get a loan against property: the process, step by step, Loan against property mistakes: red flags and a checklist, Secured or unsecured business loan: which is right for you?, Loan against property for business owners: a practical guide, Personal guarantees and collateral: what you are really signing, Received a SARFAESI notice? The first steps to take

Equity Dilution

The reduction in existing shareholders' percentage ownership that occurs when a company issues new shares to raise equity capital, whether from private equity, venture debt-linked warrants, or an IPO. The extent of dilution depends on the valuation at which new shares are issued and the amount raised. Promoters weigh dilution against the alternative cost and risk of raising the same amount through debt.

Why it matters: Before agreeing to an equity round, a promoter should model exactly how much control and future upside they are giving up at the proposed valuation.

Explained further in: Equity fundraising myths MSME promoters believe, and the reality, Equity term sheet red flags and a pre-raise checklist, How to run an equity fundraise, step by step, Merger, Acquisition or Strategic Sale: Which Route Fits?, Private equity, angel or strategic investor: who should you pick?, SME IPO or Private Equity: Which Growth Route Fits You?, Equity or debt: choosing the right capital for your stage

External Credit Rating

An independent assessment of a company's creditworthiness assigned by a credit rating agency registered with SEBI, expressed as a rating grade that reflects the agency's opinion of the borrower's ability to meet its debt obligations. Ratings are commonly used for bond issuances and larger bank facilities, and can influence the interest rate and terms a lender offers. Ratings are reviewed periodically and can be upgraded or downgraded based on the company's performance.

Why it matters: A business planning to raise larger amounts of debt should treat its external rating as something to actively manage, since an improved rating can lead to better pricing over time.

Explained further in: Credit Health, Stressed Accounts and Strategic Deals: A Full Guide, Credit Rating Myths: What Really Moves an MSME's Rating, Credit Rating Mistakes That Keep MSME Ratings Low (and Fixes), Debt raise mistakes to avoid and a lender-readiness checklist, How to Build a Credit Rating Improvement Plan, Step by Step, Request a Rating Review Now or Wait? How to Decide, Self-Review or Independent Financial Review: Which Fits?, Bank or NBFC: how to decide where to borrow, How banks rate borrowers internally, and why it affects your pricing, Improving your external credit rating: what actually moves it, Reading your commercial credit report, What lenders look for in a credit proposal

F

Fixed Asset Coverage Ratio

A ratio used mainly in project and term loan appraisal that measures the value of a company's fixed assets, net of depreciation, against its term borrowings, showing how well hard assets back the debt. A higher ratio indicates more asset backing per unit of term debt outstanding. Lenders consider it alongside DSCR and debt-equity ratio rather than in isolation.

Why it matters: This ratio matters most to businesses raising asset-heavy project finance, where lenders want assurance that the assets created can support the debt if cash flows underperform.

Explained further in: Loan against property for business owners: a practical guide, The financial ratios lenders check first

Forward Contract

An agreement between a business and a bank to buy or sell a foreign currency at a fixed exchange rate on a specified future date, used to lock in the rate for a known future receipt or payment. It is one of the most common hedging tools for exporters and importers dealing in foreign currency. Once booked, a forward contract fixes the rate regardless of how the market moves, which can work for or against the business depending on subsequent currency movement.

Why it matters: A business with regular foreign currency receipts or payments should treat currency risk as something to actively manage with tools like forward contracts, rather than leaving it to chance.

Explained further in: Cross-Border Trade Finance and Logistics: A Complete Guide, From Invoice to Settlement: The Life of a Hedged Export Receivable, Your First Ninety Days as an Exporter: A Finance Setup Plan, Forex hedging mistakes and a regular review checklist, Forward contract or natural hedge: which fits your currency exposure?, How to build a simple forex risk policy for your business, Managing currency risk as an MSME

G

GST Returns Analysis(Goods and Services Tax)

The practice of reviewing a business's filed GST returns, outward supply, input tax credit and turnover data, as a cross-check on the sales and turnover figures shown in its financial statements and CMA data. Lenders increasingly use GST return data because it is filed periodically with the tax authorities and is harder to overstate than internally prepared figures. Consistency between GST returns, audited financials and bank statements strengthens a credit proposal.

Why it matters: A business should reconcile its GST returns with its books regularly, since lenders now routinely check for mismatches before sanctioning or renewing facilities.

Explained further in: What to Do After an Independent Financial Review: A Ninety-Day Plan, How to Check Your Business's Credit Readiness Before Applying, Improving your external credit rating: what actually moves it, Preparing for an SME IPO: the readiness work that comes first, The documents you need for a business loan, The due diligence checklist every promoter should run first

H

Hypothecation

A form of security where the borrower retains possession and ownership of movable assets, such as stock, receivables, or machinery, while giving the lender a legal charge over them, recorded through an agreement and registered with the relevant authority. Unlike a pledge, the lender does not take physical possession of the goods. Cash credit facilities are typically secured by hypothecation of stock and book debts.

Why it matters: Because the business keeps using the hypothecated stock and receivables day to day, keeping records and stock statements accurate is what lets the lender rely on this form of security.

Explained further in: Secured or unsecured business loan: which is right for you?, Drawing power and stock statements, without the confusion, Personal guarantees and collateral: what you are really signing

I

IBC(Insolvency and Bankruptcy Code)

The law that provides a time-bound process for resolving insolvency of companies and individuals in India, under which creditors or the debtor can initiate proceedings before the National Company Law Tribunal to either revive the business through a resolution plan or liquidate it. It is generally considered a more formal, court-driven route compared with a negotiated one-time settlement. This is general information about how the process works, not legal advice, and a business facing potential insolvency should consult a qualified lawyer or insolvency professional.

Why it matters: A promoter should understand that once IBC proceedings begin, control of the company can pass to a resolution professional, which changes the incentives to resolve stress earlier through other routes.

IDC(Interest During Construction)

The interest cost that accrues on term loans drawn during a project's construction or implementation period, before the project starts generating revenue. IDC is typically capitalised, added to the project cost, rather than paid out of pocket, since the business has no operating cash flow yet. Lenders include IDC as a specific line item within the project cost and means of finance for a new project.

Why it matters: Underestimating IDC is a common reason project costs overrun their original DPR estimate, so promoters should build in a realistic implementation timeline.

Explained further in: Preparing a detailed project report lenders trust, Project finance for first-time promoters

In-Principle Approval

An early-stage indication from a lender that a proposal appears acceptable in principle, subject to completion of detailed appraisal, documentation, valuation and other conditions. It is not the same as a sanction letter and does not commit the lender to disburse funds. Businesses sometimes use in-principle approval to demonstrate credible progress to other stakeholders, such as a project's other funders or contractors.

Why it matters: A business should not commit to firm orders or contracts on the strength of an in-principle approval alone, since final sanction can still change the terms or amount.

Explained further in: What Happens to Your Project Report After You Submit It, SME IPO Process Step by Step: From Board Decision to Listing, Loan against property for business owners: a practical guide, The documents you need for a business loan

Interest Coverage Ratio

A ratio that measures how many times a company's operating earnings, typically EBITDA or earnings before interest and tax, cover its interest expense for a period. It is used by lenders to judge whether a business generates enough operating profit to comfortably service the interest on its borrowings, separate from principal repayment. A higher ratio indicates more comfortable headroom before interest costs become a strain.

Why it matters: Watching this ratio helps a business judge how much additional debt it can safely take on before interest costs start eating into profitability.

Explained further in: How banks rate borrowers internally, and why it affects your pricing, The financial ratios lenders check first, What lenders look for in a credit proposal

Internal Rating

A credit rating a bank or NBFC assigns to a borrower using its own internal model, based on financial ratios, conduct of account, industry outlook and management quality, separate from any external agency rating. Internal ratings drive pricing, the level of monitoring an account receives, and sometimes the security or covenants a lender asks for. Each lender's internal rating scale and methodology is proprietary and not disclosed in detail to borrowers.

Why it matters: A borrower who understands what typically drives internal ratings, timely data submission, ratio trends, account conduct, can influence it even without knowing the exact model.

Explained further in: Credit Rating Myths: What Really Moves an MSME's Rating, Credit Rating Mistakes That Keep MSME Ratings Low (and Fixes), How to Build a Credit Rating Improvement Plan, Step by Step, Request a Rating Review Now or Wait? How to Decide, Self-Review or Independent Financial Review: Which Fits?, How banks rate borrowers internally, and why it affects your pricing, Improving your external credit rating: what actually moves it, What lenders look for in a credit proposal

Invoice Discounting

A financing facility, often run through an online platform or an NBFC, where a business raises funds against unpaid customer invoices, similar in principle to bill discounting but frequently structured as a confidential or portfolio-based facility rather than discounting bills one at a time. It gives a seller quicker access to cash tied up in receivables. Costs and advance rates vary by financier and the credit quality of the underlying buyers.

Why it matters: Invoice discounting can be a useful working capital top-up for a business with strong receivables but limited fund-based bank limits.

Explained further in: Cash credit, overdraft or bill discounting: which one fits you?, Letter of credit or open account: choosing export payment terms, Export finance options for Indian exporters, Letters of credit and bank guarantees, explained

L

Lease Rental Discounting (LRD)

A term loan structure where a business, typically a property owner, borrows against the future rental income from a leased commercial property, with the rentals themselves often routed through an escrow arrangement to service the loan. The loan amount is linked to the discounted value of the future lease rentals and the value of the underlying property. LRD is commonly used by owners of commercial real estate leased to corporate tenants.

Why it matters: Because repayment depends on the tenant continuing to pay rent, the strength and remaining tenure of the lease agreement matters as much as the property's value.

Letter of Credit (LC)

A written undertaking issued by a buyer's bank to a seller, guaranteeing payment for goods or services once the seller presents documents that comply with the terms of the LC, such as shipping documents. It reduces payment risk for the seller and is widely used in both domestic and international trade. Issuing an LC uses up a facility within the buyer's sanctioned limits and generally requires margin money.

Why it matters: A business that regularly imports or buys from new suppliers should plan its LC limit as a distinct facility from its cash credit or term loans.

Explained further in: Cross-Border Trade Finance and Logistics: A Complete Guide, From Invoice to Settlement: The Life of a Hedged Export Receivable, Your First Ninety Days as an Exporter: A Finance Setup Plan, Export document mistakes that delay payment, and a checklist, How to get pre-shipment finance for an export order, Letter of credit or open account: choosing export payment terms, Export finance options for Indian exporters, Letters of credit and bank guarantees, explained

M

Margin Money

The portion of an asset's value or a transaction amount that the borrower must fund from their own resources, with the lender financing only the remaining portion. Margin is applied to working capital limits, based on stock and receivable values, term loans, based on asset cost, and non-fund facilities like letters of credit and bank guarantees. The margin percentage a lender applies depends on the asset type, the borrower's profile and the lender's own policy, and can change over time.

Why it matters: A business should factor margin money into its funding plan upfront, since it represents cash the promoter needs to bring in rather than borrow.

Explained further in: Lump sum or item rate: which painting contract suits your project?, Painting contract mistakes, and a checklist to avoid them, Plumbing contract mistakes and a pre-handover testing checklist, Drawing power and stock statements, without the confusion, How banks assess your working capital requirement, Preparing a detailed project report lenders trust, Project finance for first-time promoters

Means of Finance

The complete breakup of how a project's total cost will be funded, showing the split between the promoter's own equity contribution, term debt, and any other sources such as unsecured loans from promoters or subsidies. Lenders require means of finance to be clearly worked out alongside the project cost before appraising a project finance proposal. The proportion of debt to promoter contribution is a key factor lenders assess when deciding whether to finance a project.

Why it matters: A promoter should firm up their own contribution and any other funding sources before approaching a lender, since an unclear means of finance is a common reason project proposals stall.

Explained further in: Planning, Approving, Financing and Building a Project, How a civil construction project runs, from site survey to handover, How to plan an electrical contract for a new building or factory, How to Plan an Office or Shop Interior Fit-Out, Step by Step, How to structure the means of finance for a new unit, Project finance or a regular term loan for your expansion?, Preparing a detailed project report lenders trust, Project finance for first-time promoters

Merchant Banker

An entity registered with SEBI that manages activities such as public issues, rights issues, open offers and other capital market transactions on behalf of companies, acting as the lead intermediary that coordinates with regulators, exchanges and other advisors. An SME IPO, for instance, requires a SEBI-registered merchant banker to manage the issue. Lalsar advises and facilitates such processes but is not itself a merchant banker.

Why it matters: A company planning an SME IPO or public capital raise needs to engage a registered merchant banker early, since the merchant banker's due diligence and sign-off drive the entire timeline.

Explained further in: The First Ninety Days of SME IPO Preparation: A Practical Plan, SME IPO Process Step by Step: From Board Decision to Listing, SME IPO Readiness Checklist: Red Flags That Delay a Listing, Preparing for an SME IPO: the readiness work that comes first

Mezzanine Finance

A hybrid form of financing that sits between senior debt and equity in a company's capital structure, often structured as subordinated debt, preference shares, or debt with equity-linked features such as warrants. It typically costs more than senior debt because it ranks behind other lenders on repayment, but usually causes less dilution than a straight equity round. Mezzanine finance is generally used to bridge a gap when a business needs more capital than senior lenders will provide but wants to limit equity dilution.

Why it matters: A promoter should understand the full return the mezzanine investor expects, including any equity-linked upside, not just the headline interest rate.

Explained further in: Senior debt, mezzanine or venture debt: which fits your business?, Equity or debt: choosing the right capital for your stage

Moratorium

A defined period at the start of a term loan during which the borrower is not required to pay principal instalments, though interest may still be payable depending on the terms agreed. It is commonly given during a project's construction or ramp-up phase, before the business is generating full operating cash flow. The length of the moratorium is negotiated as part of the sanction terms and is not standard across lenders.

Why it matters: A promoter negotiating a moratorium should align it with a realistic timeline for the business or project to reach stable cash flow, not just the shortest gap the lender will offer.

Explained further in: After Commissioning: What Happens During a Project Loan's Life, What Happens After You Submit a Loan Restructuring Request, Your first ninety days after a debt raise: a practical plan, Business loan offer checklist: fees, covenants and clauses to check, How to Request a Loan Restructuring From Your Bank, How to write an information memorandum for a debt raise, Tenure Extension, Moratorium or Rate Cut: Which Restructuring Fits?, Project finance for first-time promoters, Restructuring or settlement: choosing a path for a stressed account, Term loan or working capital? Matching the facility to the need

MPBF(Maximum Permissible Bank Finance)

A traditional method banks use to assess the working capital limit a business is eligible for, based on the projected value of current assets, current liabilities other than bank borrowing, and a stipulated margin the borrower must contribute. It is one of several assessment methods alongside turnover-based methods, and different banks may apply it differently or use an alternative approach. MPBF calculations feed into the assessed working capital figure that ultimately sets the cash credit limit.

Why it matters: Understanding the logic behind MPBF helps a borrower see why the sanctioned limit may differ from what a simple percentage of turnover would suggest.

Explained further in: CMA data explained: what your bank actually reads, How banks assess your working capital requirement

Multiple Banking

An arrangement where a borrower takes separate, independently sanctioned facilities from more than one bank, without a formal consortium agreement or shared security documentation between the lenders. Each bank assesses and monitors its own exposure independently, which can mean less coordinated information sharing than under consortium lending. Multiple banking exposures are required to be reported to a common platform so lenders can see a borrower's overall exposure across banks.

Why it matters: A business under multiple banking should keep all its lenders informed of major developments, since inconsistent information across banks is a common trigger for closer scrutiny.

Explained further in: Credit Rating Mistakes That Keep MSME Ratings Low (and Fixes), Reading your commercial credit report

N

Natural Hedge

A reduction in currency risk that arises naturally from a business's own operations, such as when a company has both foreign currency receivables from exports and foreign currency payables from imports of a similar size and timing, so that currency movements broadly offset each other. It requires no separate hedging instrument or cost, unlike a forward contract. Not every business has a natural hedge, and the offset is rarely exact.

Why it matters: A business should map its actual foreign currency inflows and outflows before assuming it is naturally hedged, since a partial or mistimed offset can still leave real exposure.

Explained further in: From Invoice to Settlement: The Life of a Hedged Export Receivable, Forex hedging mistakes and a regular review checklist, Forward contract or natural hedge: which fits your currency exposure?, How to build a simple forex risk policy for your business, Managing currency risk as an MSME

NBFC(Non-Banking Financial Company)

A financial institution registered with the Reserve Bank of India that provides loans, leasing, investment and other credit-related services but does not hold a full banking licence and cannot accept demand deposits in the way banks do. NBFCs often serve segments or ticket sizes that banks are less active in, and can be faster or more flexible in underwriting, though pricing may differ from bank facilities. NBFCs are regulated by the RBI under a framework tailored to their scale and risk profile.

Why it matters: A borrower comparing a bank offer with an NBFC offer should look beyond the headline rate to processing fees, prepayment charges and turnaround time before deciding.

Explained further in: Bank or NBFC: how to decide where to borrow, MSME credit guarantee schemes: how they work

NCLT(National Company Law Tribunal)

The tribunal that adjudicates company law matters in India, including insolvency proceedings initiated under the Insolvency and Bankruptcy Code, mergers and amalgamations, and other corporate disputes. In an insolvency case, the NCLT admits the application, oversees appointment of a resolution professional, and eventually approves or rejects a resolution plan or orders liquidation. This is general information, not legal advice, and parties before the NCLT should be represented by qualified legal counsel.

Why it matters: A promoter facing or considering NCLT proceedings should get legal advice at the earliest stage, since the process moves on a fixed timetable once admitted.

Related: IBC, Resolution Plan, Restructuring, DRT

Explained further in: Merger, Acquisition or Strategic Sale: Which Route Fits?

NPA(Non-Performing Asset)

A loan account is generally classified as an NPA once interest or principal remains overdue beyond ninety days for a term loan, or a cash credit account remains out of order for a similar period, though the precise classification rules vary by facility type and are set by the regulator. Once an account becomes an NPA, the lender's provisioning and monitoring change, and further fresh lending typically becomes difficult until the account is regularised or resolved. Accounts usually pass through SMA-0, SMA-1 and SMA-2 stages before reaching NPA classification.

Why it matters: Recognising the SMA stages that precede NPA classification gives a business a real window to fix cash flow problems before the account crosses into NPA and options narrow.

Related: SMA-0, SMA-1, SMA-2, Restructuring

Explained further in: After an NPA Settlement: Closing the Account and Rebuilding Credit, Credit Health, Stressed Accounts and Strategic Deals: A Full Guide, Is Your NPA Account Worth Saving? A Viability Test for Promoters, Loan Restructuring Mistakes and a Pre-Application Checklist, NPA Negotiation Mistakes and a Document Checklist for Borrowers, What to Do When Your Loan Account Becomes an NPA, One-time settlement: a borrower's playbook, Reading your commercial credit report, Received a SARFAESI notice? The first steps to take, Restructuring or settlement: choosing a path for a stressed account, SMA-0, SMA-1, SMA-2: what each stage means and what to do

O

Operating Cycle

The time a business takes to convert its raw materials or purchased goods into cash, running from procurement through production or stocking, to sale, and finally to collection from customers. A longer operating cycle generally means more working capital is tied up at any point in time. Lenders use the operating cycle to sanity-check the working capital limit a business is requesting.

Why it matters: A business that shortens its operating cycle, through faster collections or leaner stock, can reduce its dependence on borrowed working capital.

Explained further in: Working Capital Finance Myths: How Bank Limits Really Work, Credit Rating Mistakes That Keep MSME Ratings Low (and Fixes), Forex hedging mistakes and a regular review checklist, How to build a simple forex risk policy for your business, How to build projected financials for a bank loan proposal, How to write an information memorandum for a debt raise, Working capital limit mistakes: a renewal and utilisation checklist, CMA data explained: what your bank actually reads, How banks assess your working capital requirement, Term loan or working capital? Matching the facility to the need

OTS(One-Time Settlement)

A negotiated arrangement where a lender agrees to accept a lump sum amount, usually less than the full outstanding dues, as full and final settlement of a stressed or non-performing loan account. OTS is generally considered after other resolution options have been explored, and lenders assess it against their own recovery policy and expected recovery through other routes such as SARFAESI or the IBC. The settlement amount and terms a lender will accept are decided case by case and are not something a borrower can assume in advance.

Why it matters: A borrower considering OTS should get the settlement terms in writing and understand the impact on their credit history and any personal guarantees before proceeding.

Explained further in: After an NPA Settlement: Closing the Account and Rebuilding Credit, Is Your NPA Account Worth Saving? A Viability Test for Promoters, NPA Negotiation Mistakes and a Document Checklist for Borrowers, One-time settlement: a borrower's playbook, Received a SARFAESI notice? The first steps to take, Restructuring or settlement: choosing a path for a stressed account, SMA-0, SMA-1, SMA-2: what each stage means and what to do

Overdraft

A facility that allows a business or individual to withdraw more than the balance in a current account, up to a sanctioned limit, with interest charged on the amount overdrawn. It is similar in structure to cash credit but is more commonly secured against fixed deposits, property or other collateral rather than stock and receivables, and is used by a wider range of customers including salaried individuals and professionals. Overdraft limits are reviewed and renewed periodically, similar to cash credit.

Why it matters: An overdraft secured against a fixed deposit or property can be a quicker way to access short-term funds than a fresh loan application, since it typically needs less fresh underwriting.

Explained further in: Cash credit, overdraft or bill discounting: which one fits you?, Term loan or working capital? Matching the facility to the need

P

Packing Credit

A pre-shipment finance facility that gives an exporter funds to procure raw materials, manufacture and pack goods before shipment against a confirmed export order or letter of credit. It is typically extended in rupees and is repaid once the goods are shipped and the export proceeds are realised or the bill is discounted. Packing credit in foreign currency, PCFC, is an alternative structure for exporters who prefer to borrow in foreign currency.

Why it matters: An exporter should plan packing credit against a confirmed order well ahead of the shipment date, since it is meant to fund the production cycle, not to cover a shortfall after goods are already made.

Explained further in: Cross-Border Trade Finance and Logistics: A Complete Guide, Your First Ninety Days as an Exporter: A Finance Setup Plan, Export document mistakes that delay payment, and a checklist, How to get pre-shipment finance for an export order, Export finance options for Indian exporters, Letters of credit and bank guarantees, explained, Managing currency risk as an MSME

PCFC(Packing Credit in Foreign Currency)

A variant of packing credit where the pre-shipment loan is extended in a foreign currency rather than rupees, allowing an exporter to avoid currency conversion at the borrowing stage and reduce currency mismatch against an export order denominated in that currency. It is generally available where the underlying export order or letter of credit is in a convertible foreign currency. Interest on PCFC is usually linked to an international benchmark rather than domestic lending rates.

Why it matters: An exporter with regular foreign currency orders should compare PCFC against rupee packing credit, since the choice affects both cost and currency exposure.

Explained further in: Cross-Border Trade Finance and Logistics: A Complete Guide, How to get pre-shipment finance for an export order, Export finance options for Indian exporters, Managing currency risk as an MSME

Personal Guarantee

A commitment given by an individual, typically a promoter or director, to personally repay a company's loan if the company itself is unable to do so. Lenders commonly ask for personal guarantees from promoters of privately held companies, particularly for term loans and larger working capital facilities. A personal guarantee extends the lender's recourse to the guarantor's personal assets, separate from the company's own assets.

Why it matters: A promoter should read the exact wording of a personal guarantee closely, since its scope and the conditions under which it can be invoked vary between lenders and facilities.

Explained further in: NPA Negotiation Mistakes and a Document Checklist for Borrowers, What to Do When Your Loan Account Becomes an NPA, Loan against property for business owners: a practical guide, MSME credit guarantee schemes: how they work, One-time settlement: a borrower's playbook, Personal guarantees and collateral: what you are really signing, Received a SARFAESI notice? The first steps to take, What lenders look for in a credit proposal

Pledge

A form of security where the borrower physically hands over possession of movable assets, such as shares, gold or warehouse receipts, to the lender or an approved custodian, while retaining ownership. Unlike hypothecation, the lender, or its agent, holds actual possession until the loan is repaid, which gives the lender more direct control over the asset. Pledged assets are typically valued periodically, and a fall in value can trigger a request for additional margin.

Why it matters: A borrower pledging assets like shares should track their value regularly, since a sharp fall can lead to a margin call or invocation of the pledge.

Explained further in: Personal guarantees and collateral: what you are really signing

Prepayment Charges

A fee a lender may charge when a borrower repays a loan, in part or in full, before the end of its agreed tenure, intended to compensate the lender for the interest income it will no longer earn. Charges vary by lender, loan type and whether the loan carries a floating or fixed rate, and regulatory rules limit or prohibit such charges on certain floating-rate loans to individual borrowers. The applicable charge and any exemptions should be confirmed from the loan agreement or with the lender before prepaying.

Why it matters: A business planning to prepay a loan from a future cash inflow should check the exact prepayment charge and notice period in its sanction letter well in advance, rather than assuming it will simply match the outstanding balance.

Explained further in: The life of a business loan: from first instalment to closure, Business loan offer checklist: fees, covenants and clauses to check, How to get a loan against property: the process, step by step, Loan against property mistakes: red flags and a checklist, Bank or NBFC: how to decide where to borrow, Loan against property for business owners: a practical guide

Primary Security

The asset created or acquired using the loan proceeds themselves, which the lender takes as the first and main form of security, for example the stock and receivables financed by a cash credit limit, or the machinery bought with a term loan. It is distinct from collateral security, which is additional security not directly financed by that loan. Lenders generally look first at the strength of primary security before deciding whether further collateral is needed.

Why it matters: A business should understand what counts as its primary security under each facility, since maintaining and insuring those specific assets is often a condition of the sanction.

Explained further in: Is Your NPA Account Worth Saving? A Viability Test for Promoters, Secured or unsecured business loan: which is right for you?, Drawing power and stock statements, without the confusion, Personal guarantees and collateral: what you are really signing

Private Equity

Capital invested by specialised investment firms into unlisted companies in exchange for an equity stake, typically aimed at funding growth, an ownership change, or business expansion, with the investor seeking to exit and realise returns over a multi-year horizon. Private equity investors usually negotiate governance rights, information rights and sometimes board representation as part of the investment. Terms are set out in a term sheet and subsequent definitive agreements following due diligence.

Why it matters: A promoter evaluating a private equity offer should look closely at the governance and exit rights being asked for, not just the valuation and amount on offer.

Explained further in: Equity fundraising myths MSME promoters believe, and the reality, Raising capital and credit for an Indian business: the complete guide, How to run an equity fundraise, step by step, Private equity, angel or strategic investor: who should you pick?, SME IPO or Private Equity: Which Growth Route Fits You?, Buying or selling a business in India: a practical roadmap, Equity or debt: choosing the right capital for your stage, Valuation basics for business owners

Processing Fee

A one-time fee charged by a lender to cover the cost of appraising, documenting and sanctioning a loan, typically calculated as a percentage of the sanctioned amount or a flat sum depending on the lender and product. It is generally payable at or around disbursement and is separate from ongoing interest costs. Processing fee levels and any applicable taxes vary by lender and are negotiable to some extent, especially for larger facilities.

Why it matters: A business comparing offers from different lenders should factor in the processing fee alongside the interest rate, since a lower headline rate can come with a higher upfront fee.

Explained further in: Business loan offer checklist: fees, covenants and clauses to check, How to apply for a business loan: a step-by-step guide for MSMEs, How to get a loan against property: the process, step by step, Loan against property mistakes: red flags and a checklist, Loan against property or unsecured business loan: how to choose, Bank or NBFC: how to decide where to borrow, Loan against property for business owners: a practical guide, MSME credit guarantee schemes: how they work

Project Cost

The total estimated expenditure required to set up a new project or a major expansion, covering items such as land, building, plant and machinery, pre-operative expenses, contingencies, and interest during construction. It is worked out in detail in the DPR and forms the basis on which means of finance, the split between promoter contribution and borrowed funds, is planned. Lenders scrutinise project cost estimates closely, since an underestimated cost is a common cause of project delays and cost overruns.

Why it matters: A promoter should build a reasonable contingency into project cost estimates, since actual costs commonly run higher than initial estimates by the time a project is commissioned.

Explained further in: After Interior Work Ends: Defects, Warranties and First-Year Upkeep, Building Plan Approval Myths and How the Process Really Works, Civil Contractor, Architect or Project Manager: Who Does What?, Electrical Contract Myths: What Owners Often Get Wrong, How a Building Design Evolves From Concept to Completion, Planning, Approving, Financing and Building a Project, Pre-Engineered Building Myths: What PEB Can and Cannot Do, Repainting an Occupied Office or Shop Without Stopping Work, The First Few Weeks of a Demolition Project: A Plan in Words, Your Building's Plumbing in Its First Year After Handover, Architect or Design-Build Firm: Which Should You Hire?, Architectural Drawing Checklist: What to Verify Before Construction, Building Plan Rejected or Delayed? Common Causes and a Checklist, Demolition Contractor Checklist: What to Ask and Red Flags, Electrical contract red flags and a pre-handover checklist, Full or Partial Demolition? How to Choose for Your Site, Hire a Consultant or Apply Yourself for Building Plan Approval?, How a civil construction project runs, from site survey to handover, How to Brief an Architect for a Factory, Shop or Office Building, How to Get a Building Plan Approved: A Step-by-Step Guide, How to plan a painting contract, from site survey to final handover, How to plan a plumbing contract for water supply and drainage, How to plan a pre-engineered building, from requirement to erection, How to plan an electrical contract for a new building or factory, How to Plan an Office or Shop Interior Fit-Out, Step by Step, How to Plan the Demolition of an Old Building and Clear the Site, How to structure the means of finance for a new unit, Interior Contractor Checklist: Red Flags to Check Before Hiring, Lump sum or item rate: which painting contract suits your project?, Lump Sum, Item Rate or Cost Plus: Which Interior Contract Fits?, Painting contract mistakes, and a checklist to avoid them, PEB or conventional construction for a factory or warehouse?, PEB quotation checklist: common buying mistakes to avoid, Pipe materials and plumbing contract type: what to compare, Plumbing contract mistakes and a pre-handover testing checklist, Precast or cast-in-situ construction: how to decide, Project loan appraisal: common mistakes and a checklist, Separate electrical contractor or turnkey package: which to pick?, What to ask a civil contractor before you sign: a checklist, Preparing a detailed project report lenders trust, Project finance for first-time promoters

Promoter Contribution

The portion of a project's or company's funding that the promoters themselves are expected to bring in as equity or long-term funds, rather than through borrowed money. Lenders view a healthy promoter contribution as a sign of the promoters' own commitment and risk-sharing in the venture, and it directly affects the debt-equity ratio of the funding structure. The proportion expected varies by project type, industry and lender policy rather than being a fixed rule.

Why it matters: A promoter should plan and set aside their own contribution early in the fundraising process, since a shortfall here is a common reason project finance proposals get delayed.

Explained further in: Planning, Approving, Financing and Building a Project, How to structure the means of finance for a new unit, Project loan appraisal: common mistakes and a checklist, How an MSME should prepare before raising debt, Preparing a detailed project report lenders trust, Project finance for first-time promoters

Provisional Financials

Financial statements prepared by a business itself for a period that has not yet been audited, typically used to show more recent performance than the latest audited financials allow, such as the current financial year in progress. Lenders treat provisional financials as indicative rather than fully verified, and usually still require the previous years' audited financials for a complete picture. Consistency between provisional financials and GST returns or bank statements strengthens their credibility.

Why it matters: A business should keep its provisional financials realistic and consistent with its GST filings, since an overly optimistic set of provisional numbers can undermine a lender's confidence in the whole proposal.

Explained further in: How to build projected financials for a bank loan proposal, CMA data explained: what your bank actually reads, How an MSME should prepare before raising debt, Improving your external credit rating: what actually moves it, Preparing for an SME IPO: the readiness work that comes first, The documents you need for a business loan, The due diligence checklist every promoter should run first

R

Resolution Plan

A formal proposal for reviving a financially stressed company, submitted by a prospective resolution applicant during insolvency proceedings under the IBC, or agreed between lenders and the borrower outside formal insolvency, setting out how the debt will be restructured or settled and the business run going forward. Under the IBC process, the resolution plan requires approval from the committee of creditors and the NCLT before it takes effect. This is general information, not legal advice.

Why it matters: A promoter involved in insolvency proceedings should understand that a resolution plan can change ownership and control of the company, not just the repayment terms.

Related: IBC, NCLT, Restructuring, OTS

Explained further in: Is Your NPA Account Worth Saving? A Viability Test for Promoters, One-time settlement: a borrower's playbook, Restructuring or settlement: choosing a path for a stressed account, SMA-0, SMA-1, SMA-2: what each stage means and what to do

Restructuring

A revision of a loan's original terms, such as tenure, interest rate, repayment schedule, or moratorium, agreed between a lender and a borrower facing genuine financial stress, aimed at making repayment achievable without the account slipping further or becoming an NPA. Restructuring is generally considered when the underlying business is viable but facing a temporary or identifiable cash flow problem. It is distinct from a one-time settlement, which involves accepting a reduced payoff amount rather than revising the repayment terms.

Why it matters: A business should approach its lender about restructuring as soon as stress becomes evident, since options narrow considerably once an account has already slipped into NPA.

Related: OTS, NPA, SMA-2, Moratorium

Explained further in: After Commissioning: What Happens During a Project Loan's Life, Credit Health, Stressed Accounts and Strategic Deals: A Full Guide, What Happens After You Submit a Loan Restructuring Request, How to Request a Loan Restructuring From Your Bank, Is Your NPA Account Worth Saving? A Viability Test for Promoters, Loan Restructuring Mistakes and a Pre-Application Checklist, Tenure Extension, Moratorium or Rate Cut: Which Restructuring Fits?, One-time settlement: a borrower's playbook, Received a SARFAESI notice? The first steps to take, Restructuring or settlement: choosing a path for a stressed account, SMA-0, SMA-1, SMA-2: what each stage means and what to do

S

Sanction Letter

The formal document a lender issues confirming it has approved a credit facility, setting out the amount, purpose, interest rate, tenure, repayment schedule, security to be created, and the terms and conditions the borrower must accept before disbursement. It follows detailed appraisal and is more binding than an in-principle approval, though disbursement is still conditional on completing documentation and satisfying any conditions precedent. Borrowers should read the sanction letter carefully, since its terms govern the entire relationship for the facility.

Why it matters: A borrower should compare every term in the sanction letter against what was discussed during negotiation before signing, since verbal understandings do not override the written terms.

Explained further in: After Commissioning: What Happens During a Project Loan's Life, The life of a business loan: from first instalment to closure, What Happens After You Submit a Loan Restructuring Request, What Happens to Your Project Report After You Submit It, Your first ninety days after a debt raise: a practical plan, Business loan offer checklist: fees, covenants and clauses to check, Credit Readiness Checklist: What to Fix Before You Apply, How to apply for a business loan: a step-by-step guide for MSMEs, How to get a loan against property: the process, step by step, How to Request a Loan Restructuring From Your Bank, Loan against property mistakes: red flags and a checklist, Loan Restructuring Mistakes and a Pre-Application Checklist, Request a Rating Review Now or Wait? How to Decide, Bank or NBFC: how to decide where to borrow, How an MSME should prepare before raising debt, How banks rate borrowers internally, and why it affects your pricing, Loan against property for business owners: a practical guide, MSME credit guarantee schemes: how they work, Reading your commercial credit report, The documents you need for a business loan

SARFAESI(Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act)

A law that allows banks and specified financial institutions to enforce security interests over a defaulting borrower's secured assets, typically property or other collateral, without first going to court, subject to prescribed notice periods and procedures. It gives lenders a faster route to recovery than a civil suit, though borrowers retain rights to object and approach the DRT. This is general information about how the law works, not legal advice, and a borrower who receives a SARFAESI notice should consult a qualified lawyer promptly.

Why it matters: A borrower who receives a SARFAESI notice still has defined response windows and rights, so acting quickly with proper advice matters far more than ignoring the notice.

Related: DRT, NPA, OTS, Restructuring

Explained further in: Loan against property myths, and how it really works, NPA Negotiation Mistakes and a Document Checklist for Borrowers, What to Do When Your Loan Account Becomes an NPA, One-time settlement: a borrower's playbook, Received a SARFAESI notice? The first steps to take

SMA-0(Special Mention Account)

The earliest stage of account stress classification, applied when principal or interest payments are overdue by up to thirty days on a loan account. It is an internal early-warning flag used by lenders to increase monitoring of the account, and does not by itself affect the borrower's credit rating in the way an NPA classification would. Accounts at this stage still have full access to their sanctioned facilities in the ordinary course.

Why it matters: Reaching SMA-0 is an early signal a business should treat seriously and address immediately, since it is the easiest stage at which to fix a cash flow issue before it escalates.

Related: SMA-1, SMA-2, NPA, Drawing Power

Explained further in: The life of a business loan: from first instalment to closure, Drawing power and stock statements, without the confusion, Early warning signs your loan account is under stress, Reading your commercial credit report, SMA-0, SMA-1, SMA-2: what each stage means and what to do

SMA-1(Special Mention Account)

The stress classification applied when principal or interest payments are overdue between thirty-one and sixty days on a loan account. At this stage, lenders typically intensify monitoring and may reach out to the borrower to understand the reason for delay and agree a plan to regularise the account. It is one stage more serious than SMA-0 and two stages before NPA classification.

Why it matters: A business at SMA-1 should proactively explain the reason for delay to its lender and show a credible plan to regularise, rather than waiting for the lender to escalate first.

Related: SMA-0, SMA-2, NPA, Restructuring

Explained further in: Loan Restructuring Mistakes and a Pre-Application Checklist, Drawing power and stock statements, without the confusion, Reading your commercial credit report, SMA-0, SMA-1, SMA-2: what each stage means and what to do

SMA-2(Special Mention Account)

The most advanced stress classification before an account is classified as an NPA, applied when principal or interest payments are overdue between sixty-one and ninety days. Lenders treat SMA-2 accounts with heightened scrutiny, since the account will move to NPA classification if it is not regularised within the following period. This is generally the last practical window for a borrower to resolve stress through restructuring or repayment before facing NPA-related consequences.

Why it matters: SMA-2 is effectively the last clear opportunity to resolve stress before an account becomes an NPA, so a business here should engage its lender urgently on restructuring or repayment options.

Related: SMA-1, NPA, Restructuring, OTS

Explained further in: One-time settlement: a borrower's playbook, Restructuring or settlement: choosing a path for a stressed account, SMA-0, SMA-1, SMA-2: what each stage means and what to do

SME IPO(Small and Medium Enterprises Initial Public Offering)

A public listing route on the dedicated SME platform of a recognised stock exchange, allowing smaller companies that meet the eligibility criteria to raise equity capital from the public and get their shares listed, under a lighter compliance framework than the main board. It requires a SEBI-registered merchant banker to manage the issue and involves due diligence, an enterprise valuation, and regulatory filings. Eligibility criteria, minimum public shareholding and post-listing compliance requirements are set by the exchanges and SEBI and are revised from time to time.

Why it matters: A company considering an SME IPO should start governance, financial reporting and compliance clean-up well before the listing process, since these often take longer to fix than the fundraising itself.

Explained further in: Credit Health, Stressed Accounts and Strategic Deals: A Full Guide, The First Ninety Days of SME IPO Preparation: A Practical Plan, SME IPO or Private Equity: Which Growth Route Fits You?, SME IPO Process Step by Step: From Board Decision to Listing, SME IPO Readiness Checklist: Red Flags That Delay a Listing, Preparing for an SME IPO: the readiness work that comes first

Stock Statement

A periodic declaration a borrower submits to its bank, listing the value of raw materials, work-in-progress, finished goods and receivables held as of a given date, used to calculate drawing power under a cash credit facility. Lenders typically require stock statements monthly or at another agreed frequency, and may periodically verify them through inspection or stock audit. Inaccurate or delayed stock statements are a common reason drawing power gets reduced.

Why it matters: Submitting accurate, timely stock statements is one of the simplest ways a business can keep its full drawing power available under a cash credit limit.

Explained further in: Working Capital Finance Myths: How Bank Limits Really Work, Your first ninety days after a debt raise: a practical plan, Credit Readiness Checklist: What to Fix Before You Apply, How to apply for a cash credit limit: a step-by-step guide, Working capital limit mistakes: a renewal and utilisation checklist, Drawing power and stock statements, without the confusion, Early warning signs your loan account is under stress

T

Tangible Net Worth

A company's net worth, paid-up capital plus reserves and surplus, after excluding intangible assets such as goodwill, deferred tax assets, and accumulated losses, to arrive at a more conservative measure of the owners' real stake in the business. Lenders use tangible net worth in ratios like debt-equity ratio and TOL/TNW, since intangible assets typically cannot be relied on for repayment if things go wrong. A business with significant intangible assets on its books may have a materially lower tangible net worth than its reported net worth suggests.

Why it matters: A business should calculate its own tangible net worth before applying for a large facility, since lenders will use this stricter figure rather than the net worth shown in the balance sheet headline.

Explained further in: Buying or selling a business in India: a practical roadmap, CMA data explained: what your bank actually reads, Equity or debt: choosing the right capital for your stage, How an MSME should prepare before raising debt, How banks rate borrowers internally, and why it affects your pricing, Preparing for an SME IPO: the readiness work that comes first, Valuation basics for business owners

Term Loan

A loan sanctioned for a fixed amount and tenure, typically used to fund the purchase of fixed assets, project cost, or other long-term needs, and repaid through scheduled instalments of principal and interest over the agreed period. Unlike a revolving facility such as cash credit, once a term loan instalment is repaid, that amount cannot be redrawn. Term loans may include a moratorium period and can be structured with equal instalments or other schedules such as balloon repayment.

Why it matters: A business should match the term loan's repayment schedule to the actual cash flow the financed asset or project is expected to generate, not just to the lowest possible instalment.

Explained further in: After Commissioning: What Happens During a Project Loan's Life, Loan against property myths, and how it really works, Planning, Approving, Financing and Building a Project, Raising capital and credit for an Indian business: the complete guide, The life of a business loan: from first instalment to closure, Your first ninety days after a debt raise: a practical plan, How to apply for a business loan: a step-by-step guide for MSMEs, How to structure the means of finance for a new unit, How to write an information memorandum for a debt raise, Loan against property or unsecured business loan: how to choose, Pipe materials and plumbing contract type: what to compare, Project finance or a regular term loan for your expansion?, Secured or unsecured business loan: which is right for you?, Senior debt, mezzanine or venture debt: which fits your business?, Term loan or working capital? Matching the facility to the need

Term Sheet

A non-binding, or partly binding, document that sets out the key commercial terms proposed for a transaction, such as an equity investment, a merger, or a major credit facility, before detailed due diligence and definitive legal agreements are finalised. It typically covers valuation or pricing, structure, key rights, conditions and an exclusivity or timeline commitment. Signing a term sheet is an important milestone but is not the same as a completed, binding transaction.

Why it matters: A promoter should negotiate the key economic and control terms at the term sheet stage, since it is much harder to renegotiate fundamentals once due diligence and legal documentation are underway.

Explained further in: Business Sale Myths: How Selling a Company Really Works, Equity fundraising myths MSME promoters believe, and the reality, Business Sale Mistakes and a Term Sheet Checklist for Promoters, Equity term sheet red flags and a pre-raise checklist, How to run an equity fundraise, step by step, Merger, Acquisition or Strategic Sale: Which Route Fits?, Private equity, angel or strategic investor: who should you pick?, Buying or selling a business in India: a practical roadmap, Equity or debt: choosing the right capital for your stage, Valuation basics for business owners

TOL/TNW Ratio(Total Outside Liabilities to Tangible Net Worth Ratio)

A leverage ratio comparing a company's total outside liabilities, all borrowings and other external dues, to its tangible net worth, giving a broader view of leverage than the debt-equity ratio alone since it includes items like trade creditors and other current liabilities. Lenders use it to assess the overall claim external parties have on the business relative to the owners' real stake. Acceptable levels vary by industry and lender policy rather than following one fixed benchmark.

Why it matters: A business with high trade creditors alongside its bank debt should watch TOL/TNW specifically, since it can look more leveraged on this ratio than on debt-equity ratio alone.

Explained further in: Improving your external credit rating: what actually moves it, The financial ratios lenders check first, What lenders look for in a credit proposal

TReDS(Trade Receivables Discounting System)

An institutional electronic platform, operating under a framework set by the Reserve Bank of India, that allows businesses, particularly smaller suppliers, to auction their trade receivables from larger corporate buyers to multiple financiers and receive early payment at a competitively discounted rate. It is designed to give suppliers, especially smaller ones, faster and more transparent access to receivables financing than bilateral bill or invoice discounting. Participation requires onboarding on one of the RBI-authorised TReDS platforms.

Why it matters: A smaller supplier to large corporate buyers can use TReDS to get paid earlier without depending solely on its own bank limits.

Explained further in: Export finance options for Indian exporters

U

Udyam Registration

The official government registration that classifies a business as a micro, small, or medium enterprise based on investment and turnover criteria, replacing the earlier Udyog Aadhaar system. Udyam registration is typically required to access MSME-specific benefits, including certain government schemes, priority sector lending consideration, and credit guarantee cover such as CGTMSE. The specific investment and turnover thresholds for each category are set by the government and are revised periodically.

Why it matters: A business should keep its Udyam registration current and accurately classified, since it can be a gateway to schemes and credit guarantee cover it would not otherwise access.

Explained further in: How an MSME should prepare before raising debt, The documents you need for a business loan, The due diligence checklist every promoter should run first

V

Venture Debt

A form of debt financing typically extended to early-stage or growth companies that have already raised, or are raising, equity capital, often from venture capital investors. It supplements equity funding to extend a company's cash runway or fund specific growth needs without the additional dilution a larger equity round would cause. Venture debt providers usually structure some equity-linked upside, such as warrants, alongside the interest cost, given the higher risk profile of these borrowers.

Why it matters: A growth-stage company should weigh venture debt's added repayment obligation against the dilution it saves, since taking on debt without matching revenue growth can strain cash flow.

Explained further in: Senior debt, mezzanine or venture debt: which fits your business?, Equity or debt: choosing the right capital for your stage

W

Working Capital Gap

The difference between a business's current assets, stock, receivables and other short-term assets, and its current liabilities other than bank borrowing, trade creditors and similar dues, representing the portion of working capital the business needs to fund itself or through bank finance. It is a central figure in CMA data and in methods like MPBF used to assess how much working capital finance a lender should sanction. A widening working capital gap without a matching increase in sanctioned limits is often an early sign of a cash flow squeeze.

Why it matters: Tracking the working capital gap over time, not just at the point of applying for a loan, helps a business spot a funding shortfall before it turns into a stretched account.

Explained further in: Raising capital and credit for an Indian business: the complete guide, What to Do After an Independent Financial Review: A Ninety-Day Plan, Working Capital Finance Myths: How Bank Limits Really Work, Your First Ninety Days as an Exporter: A Finance Setup Plan, How to apply for a cash credit limit: a step-by-step guide, How to get pre-shipment finance for an export order, CMA data explained: what your bank actually reads, Early warning signs your loan account is under stress, How banks assess your working capital requirement, Term loan or working capital? Matching the facility to the need, The financial ratios lenders check first