Business Loans
How to Read a Loan Sanction Letter — What to Check Before You Sign
The most important document in your lending relationship. Most borrowers sign it without reading it.
By FinAxis Team
A loan sanction letter is the lender's formal offer. It specifies the exact terms under which they will lend you money. Once you accept and sign, these terms govern your entire relationship with the lender. Changing them later is difficult, expensive, or impossible.
Reading it carefully takes 30 minutes. Ignoring it can cost you years of avoidable expense and frustration.
The 10 things to verify in every sanction letter
01Loan Amount Confirm the sanctioned amount matches what was applied for. If it is lower, understand why — and whether the reduced amount still meets your purpose.
02Interest Rate — fixed or floating? A floating rate changes with market rates (linked to RBI's repo rate). A fixed rate stays constant. Understand which you have, and what happens if rates rise.
03Tenure Confirm the repayment period. Ensure the EMI over this tenure is genuinely manageable — not just barely workable in the best-case scenario.
04EMI Amount and Start Date When does the first EMI fall due? Is there a moratorium period? Confirm the exact amount and ensure your cash flow can support it from day one.
05Processing Fee The amount deducted before disbursement. Confirm the exact number — not a percentage range. This determines how much you actually receive.
06Prepayment Terms Is there a lock-in period? What is the prepayment charge after the lock-in? This determines your flexibility to close the loan early.
07Collateral and Security Details What exactly have you pledged? Confirm property details, valuation, and the process for release of security upon full repayment.
08Conditions Precedent What must you do before disbursement happens? Typical conditions: submitting additional documents, paying processing fees, completing property registration.
09Covenants and Restrictions Some business loans include restrictions on taking additional debt, distributing profits, or changing ownership. Read these carefully — they can significantly constrain your business.
10Events of Default What triggers a default call? Beyond missing EMIs, some loans define default as a drop in turnover, a change in promoters, or a deterioration in financial ratios. Know the triggers.
HERE'S A THOUGHTA business owner signed a sanction letter without noticing a covenant that required maintaining a minimum current ratio. 18 months later, after a difficult quarter, the bank triggered a default clause — not because an EMI was missed, but because the current ratio had slipped below the threshold. The business was perfectly viable. The covenant was the problem. It was in page 4 of the letter. Unread.
THE BOTTOM LINEA sanction letter is a contract. Treat it like one. Read it in full — preferably with your CA or a financial advisor. Ask questions about anything unclear. And if a term is unacceptable, negotiate before signing. After signing, the terms are fixed.
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