Documents to prepare before you approach a bank
A calm checklist for owners: the papers, records and explanations to get in order months before applying for finance, and what to ask the bank.
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Most owners think about a bank only when the money is needed, and then discover that the records are scattered, the accounts are mixed with household spending and nobody can say quickly what the business earned last year. A lender who cannot see the business clearly has little reason to trust it.
This checklist helps you prepare ahead. It describes what banks commonly ask for and how to get your own records into shape. It cannot tell you what your bank will require, and it does not promise approval. Requirements differ between lenders and kinds of finance and change over time, so check the current list with your bank, and take your records to a chartered accountant before you apply.
What you should come away with
- Start preparing months before you need the money, not the week before
- Banks commonly ask for identity papers, business proof, bank statements and tax filings, but the exact list varies, so ask
- Records that agree with each other matter as much as records that exist
- Keep personal and business money apart, and do not adjust figures to look better
- Check your own credit report, and be ready to explain the purpose, amount and repayment
- Ask what the bank needs from a business like yours, and have a chartered accountant review your papers
Begin with what the lender is trying to judge. In simple terms, a bank wants to know whether the business can repay from its own earnings, whether it has a track record that is documented, and what protects the bank if things go wrong. Every document you are asked for is a way of answering one of those questions. Once you see that, preparation becomes less of a paper chase and more of a way to tell a consistent story.
The first group of papers is about who you are. Expect to be asked for identity and address proof of the owner or owners, and for papers that show the business exists and where it operates. Depending on how the business is set up, that can include a registration certificate, a partnership deed or incorporation papers, a shop or trade licence, a GST registration where it applies, and Udyam registration for micro and small enterprises.
The second group is about money moving through the business. Banks commonly ask for statements of the business bank account for a recent period, often six months to a year, and sometimes for statements of the owner's personal accounts as well. This is where mixed accounts hurt. If the household's expenses and the business's receipts run through one account, the statement tells a muddled story.
The third group is about what the business reports. Depending on the size of the business and the kind of finance, lenders usually look at income tax returns and computations, GST returns where they apply, and financial statements such as a balance sheet and profit and loss account. Some lenders ask for several years of these. Do not wait to be asked. If your returns are late, or your financial statements have never been prepared, speak to a chartered accountant now.
Then check that the numbers agree. If a lender notices that the figures tell different stories and you cannot say why, it may reduce confidence in all of them. Never change figures to look better. If something is wrong, correct the records with a professional's help.
The fourth group is your credit history. Lenders look at the credit history of the owner, and often of the business, with credit information companies, commonly called credit bureaus. An individual in India can request one free full credit report a year from each credit information company, under an RBI direction in force since 2017. Read it carefully. Look for loans or cards you do not recognise, dues shown as unpaid that you have paid, and old accounts that should have been closed. Mistakes can be disputed, but corrections take time, which is another reason to look months in advance. Also list your existing loans, EMIs, credit card dues and any guarantees you have given for others, because the lender will see them.
The fifth group is the explanation. Write one page about the business: what you sell, to whom, how long you have been operating, who your main customers and suppliers are, what your main costs are and who runs the business. Then write a short note on the request itself. What exactly is the money for? How did you arrive at the amount? How and from what earnings will it be repaid, and what happens in a slow month?
The sixth group is security and schemes. Ask the bank what security, if any, it will want, including whether it asks for a guarantee from you personally or from someone else. Government-backed credit guarantee arrangements, such as the one run by the Credit Guarantee Fund Trust for Micro and Small Enterprises, exist for some collateral-free loans to micro and small enterprises, and Udyam registration is required to obtain that cover. But whether a scheme applies to your loan is for the lender to decide, and limits and conditions are revised from time to time, so ask the bank directly and check the official site for the current position. No document you prepare creates a right to a loan.
Finally, prepare your questions. What documents does the bank need from a business like mine? What fees will I pay? What is the full repayment schedule and the total cost over the term? What happens if I want to repay early or miss an instalment?
A practical way to use this checklist is to give yourself ninety days. In the first month, gather the papers and read your credit report. In the second, fix what is missing or inconsistent with your accountant's help, and write the one-page summary and the purpose note. In the third, visit the bank with your questions before you apply. If you find, along the way, that the business is not yet ready, you have lost nothing, and you know what to work on.