Founder Finance Decision-Making

A sanctioned loan feels like a solved problem. It's actually a new fixed monthly obligation layered on top of whatever problem made the loan feel necessary in the first place — and whether that's a good trade depends on questions most founders don't ask until after the money has already arrived.

None of this is an argument against borrowing. Debt, used deliberately, is one of the most useful tools a growing business has. The problem is almost never the loan itself — it's the loan taken reactively, under pressure, without having run the numbers that would have told you whether it was the right size, at the right time, for the right reason.

What lenders are actually checking

Banks and NBFCs assess your Debt Service Coverage Ratio (DSCR) — your projected net cash flow divided by your annual debt obligations — and typically want to see a DSCR of at least 1.25 to 1.4 before approving a loan. If your projected annual cash flow is ₹30 lakh and your annual EMI obligation is ₹20 lakh, that's a DSCR of 1.5, comfortably above the threshold. Below 1.25, most lenders will either decline or price the loan more expensively to compensate for the risk they're taking on.

The question DSCR is really asking

DSCR isn't really about satisfying a bank — it's the same question you should be asking yourself: if revenue dipped 20% next year, would this EMI still get paid comfortably, or would it become the reason for a cash crisis? A loan sized against your best-case cash flow, rather than a realistic one, is a loan that turns a normal bad month into a covenant breach.

Running your own DSCR against a conservative, not optimistic, cash flow forecast is one of the simplest checks available before signing anything — and it's the one most founders skip, because the bank already ran a version of it and approval felt like enough of a green light on its own.

What the sanction letter doesn't spell out

• Personal guarantees, which mean a business default becomes a personal liability, not just a company one.
• Prepayment penalties, which can make it expensive to close a loan early even if cash flow improves faster than expected.
• Collateral requirements — though CGTMSE-backed schemes can provide collateral-free credit up to ₹10 crore for MSMEs (₹20 crore for recognised startups), with the government trust covering 75-85% of the lender's loss on default.
• A fixed EMI obligation that doesn't flex with seasonal revenue, even for businesses with genuinely seasonal cash flow.

Each of these tends to surface only when something has already gone wrong — a personal guarantee gets called on, an early repayment gets penalised, or a seasonal slow month collides with a fixed EMI that was sized for an average month, not a lean one. All four are negotiable or at least knowable in advance, but only if someone asks before signing.

The question to ask before applying, not after approval

What specific need is this loan funding, and what is the specific, identifiable source of cash that will repay it? "General working capital cushion" is not a repayment plan — it's a hope. A loan taken to bridge a receivables gap you haven't fixed just adds a fixed monthly obligation on top of a cash flow problem that's still unresolved.

If you're currently building a loan application, running the DSCR math honestly — against a realistic scenario, not your best one — is worth doing before the paperwork, not after the funds land.

Sources: DSCR thresholds and CGTMSE scheme details reflect commonly cited 2026 lending norms for Indian MSME loans; actual terms vary by lender and should be confirmed directly with the financing institution.