How Banks Verify Customer Letters of Intent (LOIs) in a Project Report
Although a customer Letter of Intent (LOI) is not always regarded as a guaranty of future revenue, it can bolster a bank loan project report by demonstrating possible demand for the suggested good or service. Before determining how much weight to give the LOI, a bank may compare it with the applicant's sales forecasts, production capacity, current customer data, orders in hand, and other business evidence. Sharda Associates uses customer LOIs as supporting information in CA-expert-led project reports where relevant, but projected sales should still be based on realistic financial and operating assumptions rather than assuming that every LOI will become a completed sale.
What Does a Customer's Letters Of Intent Actually Prove?
Suppose you are planning a new manufacturing unit and a potential customer gives you a letter stating:
“We intend to purchase approximately 10,000 units annually, subject to price, quality and commercial terms.”
That is useful.
It shows there may be genuine customer interest.
But it is not necessarily the same as:
A binding purchase order
A signed long-term supply agreement
An invoice
Money received from the customer
An LOI generally shows intention, and its commercial strength depends heavily on its wording.
Some LOIs may be detailed and specific. Others may simply say the customer is “interested in doing business.”
The bank is therefore likely to look beyond the heading Letter of Intent and understand what the document actually says.
What Details Make a Customer LOI More Credible?
A useful LOI should make the proposed relationship understandable.
A one-page letter saying:
“We intend to purchase your products in future.”
may provide much less support than a detailed LOI explaining products, expected quantities and commercial conditions.
How Can the Bank Compare the LOI With Your Sales Forecast?
One of the most crucial checks is this one.
Let's say your DPR displays:
Projected sales for the first year are ₹4 crore; however, the total amount of potential business indicated by your customer LOIs is only ₹60 lakh.
This does not imply that your ₹4 crore estimate is incorrect.
You might have open-market sales or other clients.
However, the DPR should specify the anticipated source of the remaining revenue.
It is also possible for the opposite to occur.
Even though your machinery can only sustain ₹2 crore of annual production, you may have LOIs for ₹5 crore.
The bank can then doubt the company's ability to fulfil the specified requirement.
The MSME policy of the Bank of India offers a helpful example of how sales forecasts can be verified. It includes things like past sales, invoices, GST-related data when relevant, electricity usage, current or anticipated orders, installed capacity, and general market trends.
The LOI therefore works best when it fits the rest of the project.
Can the Bank Verify Whether the Customer Is Genuine?
Potentially, yes.
The exact level of verification depends on the bank, size of the exposure, credit policy and circumstances of the proposal.
The lender may first compare the customer named in the LOI with information available in the loan file.
For example:
Is the customer mentioned among major buyers?
Does the customer operate in an industry that would realistically buy the product?
Does the contact information appear genuine?
Does the LOI use proper company details?
Does the proposed quantity appear commercially reasonable?
Information on significant clients or purchasers and, if relevant, the borrower's order-book position encompassing projects received, under implementation, or projected are expressly included in Union Bank's credit-document criteria.
A lender may also request more proof or explanation for significant or unusual transactions. Borrowers should not, however, believe that all banks use the same verification process or that every letter of intent will always be confirmed directly by the customer.
What Other Documents Can Support an LOI?
An LOI becomes stronger when other evidence tells the same story.
Depending on whether the business is new or existing, useful supporting information may include:
Purchase orders
Work orders
Customer emails
Draft supply agreements
Existing invoices
Delivery challans
Previous sales to the same customer
Bank credits from the customer
GST sales information where relevant
Customer pipeline or order-book statement
For instance, the commercial-loan application checklist from AU Small Finance Bank notably lists supporting papers such contracts/work orders and, for pertinent enterprises, dealership agreements or LOIs.
This demonstrates why LOIs should not be viewed as independent evidence of guaranteed revenue but rather as a component of a larger body of evidence.
What If the Business Is New and Has No Previous Sales?
This is where LOIs can become particularly useful.
A new manufacturing unit cannot show three years of invoices because it has not started operations.
The project may instead have:
Customer discussions
LOIs
Trial orders
Distributor interest
Dealer appointments
Market research
Existing promoter relationships
These can help support the commercial assumption.
However, the sales forecast should still consider:
Customer interest + production capacity + achievable utilisation + pricing + working capital + implementation timing.
For example, a customer may want the product immediately, but if your plant requires six months to install, that demand may not translate into Year 1 sales in the way the DPR originally assumes.
Why Can an LOI Still Fail to Convince the Bank?
One reason is that the document may look artificially created only for the loan application.
Warning signs can include:
No clear customer details
No product description
No quantity
No validity period
No commercial terms
Identical wording across several customers
Extremely high order value compared with customer size
LOI dated immediately before the loan application with no supporting communication
Revenue projections far exceeding the LOI or production capacity
Another problem is treating a conditional LOI as guaranteed turnover.
For example:
“We may purchase up to ₹2 crore subject to successful product testing and mutually agreed prices.”
This should not automatically be shown in the DPR as:
Confirmed sales = ₹2 crore.
The condition matters.
How Should an LOI Be Presented in the Project Report?
Instead of simply writing:
“We have customer LOIs worth ₹3 crore.”
show the relationship clearly.
Illustrative Example
Then explain how much of projected turnover is based on these potential customers and how much is expected from other channels.
This is more transparent than presenting every potential enquiry as confirmed revenue.
Should LOI Value Equal Your Projected Revenue?
No.
An LOI is supporting evidence, not a formula requiring sales to equal the exact LOI value.
Your projected revenue may be lower because:
Production starts partway through the year
Capacity is ramped up gradually
Not every LOI converts
Customer orders are phased
Or it may be higher because the business expects sales from additional customers and channels.
The difference should simply be explainable.
What Should You Check Before Submitting LOIs to the Bank?
As if you were the credit officer, read each LOI.
Enquire:
Is this client genuine?
Why would people purchase this item?
Does the amount fit my capacity?
Does the timeframe align with my schedule for implementation?
Are there any requirements that might make the purchase impossible?
Have I displayed an indicative LOI as a firm order in error?
It is not necessary for a credible DPR to act as though there is no ambiguity.
It must adequately explain uncertainty.
For a CA-certified project report or expert assistance, contact Sharda Associates at +918989977769
Read More : https://shardaassociates.in/blogs/
Final Takeaway
A customer LOI can be useful evidence that your project has potential demand, particularly for a new business without historical sales.
But the strongest loan proposal does not rely on the LOI alone.
The bank may look at the wider chain:
LOI → Customer → Product → Quantity → Production Capacity → Sales Forecast → Working Capital → Cash Flow → Repayment
When these items agree with each other, the LOI supports the commercial story of the project.
When they conflict, even several LOIs may not make the sales projection convincing.
Frequently Asked Questions
1. Does a customer LOI guarantee that a bank will accept projected sales?
No. It can support the projection, but the lender performs its own credit appraisal.
2. Is an LOI the same as a purchase order?
No. A purchase order generally represents a more specific commercial order, while an LOI can be preliminary or conditional.
3. Can a bank verify the customer named in the LOI?
A lender may undertake further verification depending on its credit process and the circumstances, but there is no single universal procedure followed by every bank.
4. Should the LOI mention the order value?
It is useful where genuinely agreed or indicative, but the wording should accurately reflect whether the amount is firm or conditional.
5. Can a startup use LOIs if it has no past turnover?
Yes. LOIs can help demonstrate potential customer interest when historical sales do not exist.
6. Can I include several LOIs in one DPR?
Yes. A customer-wise summary can make the demand evidence easier to understand.
7. What if the LOI expires before loan sanction?
An updated LOI or additional customer evidence may be useful if the original document is no longer commercially relevant.
8. Should all LOIs be treated as confirmed orders?
No. Their wording and conditions should determine how they are described.
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