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Glossary of business loan terms: plain meanings lenders use

This glossary explains the business loan terms Indian lenders use most, in plain words. Each entry gives a short definition, how lenders use the term, a worked example and links to related pages. The terms follow a loan's life: what you are offered, what it costs, how lenders judge you, and what secures it.

Loan products, rates, and eligibility are determined by the lenders on our panel. Capnix is not a lender and does not lend its own capital. We run your loan journey end to end.

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Why business loan terms matter before you apply

A loan offer is a contract written in a few dozen terms. Most of them decide money: how much you receive, what you repay each month, and what happens if a payment slips. Two offers can quote the same interest rate and still cost very different amounts, because the difference sits in a fee, a tenor or a condition in the sanction letter.

This glossary covers thirteen business loan terms that come up in almost every Indian business loan, whether the lender is a bank or an NBFC (a non-banking financial company, regulated by RBI but unable to take demand deposits). Each entry is short. Read the one you need, then follow its links to the longer guides.

Capnix is not a lender. Every amount, rate and decision described here is set by the lender, under RBI rules or a scheme's rules.

The thirteen terms, grouped by stage

The offer and the money

  • Sanction: the lender's formal approval of an amount, rate, tenor and conditions, set out in a sanction letter.
  • Disbursal: the payment of sanctioned money into your bank account, in one go or in tranches.
  • Tenor: the time you have to repay. A longer tenor lowers each EMI but raises total interest.

The cost

  • Key Fact Statement (KFS): the lender's standard summary of the loan's cost and terms, given before you sign.
  • APR: the Annual Percentage Rate, the yearly cost including interest and all other charges.
  • Processing fee: a one-time charge for assessing and setting up the loan, usually deducted at disbursal.

How lenders judge repayment

  • FOIR: Fixed Obligations to Income Ratio, the share of monthly income already committed to EMIs.
  • DSCR: Debt Service Coverage Ratio, how many times yearly cash accruals cover the year's repayments.
  • CIBIL MSME Rank: a 1 to 10 risk rank for a business with commercial credit, from TransUnion CIBIL, a credit bureau.
  • Business vintage: how long a business has been trading, read from its GST, bank and tax records.

Registration and security

  • Udyam registration: the government's free registration that records a business as micro, small or medium.
  • Collateral: an asset pledged so the lender can recover its money if the loan is not repaid.
  • Drawing power: the part of a cash credit limit your current stock and receivables support today.

How the business loan terms fit together

The terms are not separate rules. They interlock, and one changes another.

Sanction sets the frame. The sanction letter fixes the amount, the tenor, the security and the fees. It also lists the conditions you must meet before disbursal. Nothing is paid at sanction.

The KFS shows the cost. For new business term loans sanctioned on or after 01-Oct-2024, RBI requires lenders to give a Key Fact Statement (RBI notification, 15-Apr-2024). It carries the APR, which RBI defines as the annual cost of credit including the interest rate and all other charges (RBI notification). A fee left out of the KFS cannot be charged later without your explicit consent (RBI notification).

Tenor moves the EMI. On an example loan of ₹10,00,000 at an example rate of 14% a year, the EMI is ₹34,178 over 36 months and ₹23,268 over 60 months (Standard loan EMI formula). The second is easier to carry each month, but you pay it for two more years.

FOIR and DSCR test whether you can carry it. FOIR compares fixed monthly obligations with income, and each lender sets its own limit, because no regulator defines one (No official definition). DSCR compares a year's cash accruals with the year's repayments, using a formula RBI has published (RBI notification, 07-Sep-2020). A longer tenor lowers the yearly repayment, which improves both ratios.

The CMR and the owner's score shape the price. The CIBIL MSME Rank runs from CMR-1, least risky, to CMR-10, most risky (TransUnion CIBIL). Some banks set their interest spread by it.

Collateral and Udyam change what can be asked. Banks must not take collateral on loans up to ₹20,00,000 to micro and small enterprises sanctioned or renewed from 01-Apr-2026 (RBI notification, 09-Feb-2026). Whether a business counts as micro or small is read from its Udyam certificate, which the government issues free (Udyam Registration portal).

Drawing power governs working capital. For a cash credit limit, what you can draw is not the sanction but the drawing power, worked out from a stock statement that must be current (RBI Master Circular on asset classification).

Using the glossary when you compare offers

Read every offer in the same order. First the sanctioned amount and tenor. Then the KFS: compare APRs, not headline rates. Then the conditions: collateral, guarantees, and any statement or stock reporting you must keep up. A cheaper rate with a heavy condition can cost more in practice than a dearer, simpler loan.

If you are not sure where your business stands on the ratios lenders read, the free Capnix readiness check gives your business a Capnix score from 0 to 100 and shows what to fix first. It is a readiness measure, not a bureau score.

In this section

APR meaning in loan APR meaning in loan: APR is the Annual Percentage Rate, the yearly cost of credit including the interest rate and all other charges, such as the processing fee. RBI requires lenders to show it in the Key Fact Statement. Because it adds fees to interest, APR is the fair figure for comparing two loan offers. Business vintage Business vintage is how long a business has been trading, counted from evidence of real activity such as GST filings, banking and tax returns. No law sets a minimum. Each lender sets its own, and two banks we checked ask for at least 3 years for an unsecured business loan. CIBIL MSME Rank CIBIL MSME Rank, or CMR, is a 1 to 10 rank that TransUnion CIBIL gives a business with commercial credit. CMR-1 is the least risky and CMR-10 the most. It predicts the chance of the business's loans turning bad in the next 12 months. It is separate from the owner's personal CIBIL score. Collateral meaning Collateral meaning: collateral is an asset, such as property, deposits or gold, that you pledge to a lender in addition to the loan's own assets. If the loan is not repaid, the lender can recover its money from that asset. Loans without collateral are called unsecured or collateral-free. Disbursal meaning Disbursal meaning, in one line: it is the payment of a sanctioned loan into the borrower's bank account. It happens after sanction, once you sign the loan documents and meet the conditions. A loan can be disbursed in one payment or in parts, called tranches, and interest usually runs only on what has been paid out. Drawing power meaning Drawing power meaning: drawing power is the amount you may actually withdraw from a cash credit account at a given time. The bank works it out from your latest stock and receivables statement, after keeping a margin. It can never exceed the sanctioned limit, and it falls when your stock or receivables fall. DSCR meaning DSCR meaning: DSCR stands for Debt Service Coverage Ratio. It shows how many times a business's yearly cash accruals cover the loan principal and interest due that year. A DSCR above 1 means the business earns more cash than it must repay. Lenders read it to judge whether repayments are safe. FOIR meaning FOIR meaning: FOIR stands for Fixed Obligations to Income Ratio. It is the share of your monthly income already committed to fixed payments such as EMIs, including the new loan you are asking for. Lenders use it to judge whether you can carry one more instalment. A lower FOIR leaves more room to borrow. Key fact statement A key fact statement, or KFS, is a short standard summary the lender must give you before you sign. It shows the loan amount, interest rate, fees, the Annual Percentage Rate (APR) and key terms in one place. A fee missing from the KFS cannot be charged later without your explicit consent. Processing fee meaning Processing fee meaning: a processing fee is a one-time charge a lender takes for assessing and setting up a loan. It is usually a percentage of the loan, plus taxes, and is often deducted from the amount disbursed. Each lender sets its own fee, and it must appear in the Key Fact Statement. What is sanction in loan What is sanction in loan? Sanction is the lender's formal approval of your loan. The lender fixes the amount, interest rate, tenor, security and conditions, and puts them in a sanction letter. Sanction is a decision on paper. Money reaches your account only later, at disbursal, once you meet the conditions. Loan tenor meaning Loan tenor meaning: tenor is the length of time you have to repay a loan, usually stated in months. It is set at sanction. A longer tenor spreads the principal over more instalments, so each EMI is smaller, but interest runs for longer, so the total you repay is higher. Udyam registration meaning Udyam registration meaning: Udyam is the Government of India's free, online registration for micro, small and medium enterprises. It needs an Aadhaar number, carries no fee and needs no renewal. The Udyam certificate records whether a business is micro, small or medium, and banks use that record to classify its loans.

Frequently asked questions

The amount, the interest rate, the tenor, the fees and the security. All five are fixed in the sanction letter, and the cost terms appear in the Key Fact Statement.

Sanction is the lender's approval on paper. Disbursal is the payment into your bank account, which follows once the sanction conditions are met.

KFS stands for Key Fact Statement, the lender's standard summary of a loan's cost and terms. RBI requires it for new business term loans sanctioned from 01-Oct-2024.

No. APR adds fees and other charges to the interest rate, so it shows the full yearly cost. Compare offers on APR.

Both test whether you can afford repayments. DSCR uses a business's yearly cash accruals; FOIR uses monthly income and EMIs.

For bank loans up to ₹20,00,000 to micro and small enterprises sanctioned or renewed from 01-Apr-2026, banks must not take collateral. Above that, the lender decides.

Lower is better. CMR-1 is the least risky rank and CMR-10 the most risky.

No. Capnix is not a lender. The lender decides the amount, rate, tenor, fees and security.

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