Factors That Affect Business Loan Interest Rates
Business loan interest rates vary based on multiple factors that lenders consider before approving a loan. Here are the key factors that influence the interest rate:
Loan Amount
The loan amount affects the interest rate, as lenders assess risk based on the borrowing sum. Higher loan amounts may come with lower rates for established businesses, while smaller loans often have higher rates due to increased risk.
Loan Tenure
Loan tenure refers to the duration for which the loan is taken. Shorter tenures usually have higher interest rates since lenders recover their money faster, while longer tenures may have lower rates but result in higher overall interest paid.
Type of Business Loan
Lenders provide both secured and unsecured business loans. Secured loans, backed by assets like property or equipment, usually have lower interest rates. In contrast, unsecured loans, which do not require collateral, carry higher rates due to the greater risk for lenders.
Credit Score and Financial Health
A borrower’s credit score and financial history play a crucial role in determining the interest rate. A high credit score (750 and above) may lead to lower rates, while a poor credit score could result in higher rates or loan rejection. Lenders also check business turnover and profit before deciding the rate.
Nature and Age of Business
New businesses or start-ups may face higher interest rates as they have no proven financial history. Established businesses with a stable revenue stream and operational history are considered lower risk and may get better rates.
Market Conditions and RBI Policies
Interest rates fluctuate based on the Reserve Bank of India’s (RBI) monetary policies and economic conditions. When the RBI increases repo rates, lending rates also rise, making business loans costlier. Conversely, lower repo rates may lead to reduced interest rates.
Lender’s Internal Policies
Each lender has its own way of evaluating loan applications. Some may offer competitive rates to attract borrowers, while others may charge higher rates due to their risk assessment policies. Comparing rates from multiple lenders is essential to find the best deal.
How to Compare Business Loan Interest Rates
Comparing interest rates helps in choosing a loan that costs less and suits the business needs. Follow these steps to compare business loan interest rates:
Check Interest Rate Type
Business loans come with two types of interest rates:
- Fixed Interest Rate – The rate remains the same throughout the loan tenure
- Floating Interest Rate – The rate changes based on market conditions
A fixed rate is predictable, while a floating rate may be lower at times but also come with risks of increase.
Compare Interest Rates from Multiple Lenders
Different banks and NBFCs offer different interest rates. Below is a table comparing the business loan interest rates from some financial institutions in India:
Check Processing Fees and Other Charges
Apart from interest rates, lenders may charge:
- Processing Fees – A one-time fee for processing the loan application
- Prepayment Charges – A fee for repaying the loan before the tenure ends
- Late Payment Penalties – A charge for missing EMI payments
These extra costs could increase the total loan expense
Compare EMI Amounts
Using an EMI calculator, borrowers can estimate the monthly payments based on the loan amount, interest rate, and tenure. Choosing an affordable EMI helps in better financial management.
Look for Special Offers
Some lenders offer lower interest rates to women entrepreneurs, new businesses, or MSMEs. Checking for such offers may help in reducing loan costs.
How to Apply for a Business Loan
To apply for a business loan, follow these quick and easy steps to ensure quick approval:
- Check the lender’s eligibility criteria based on business age, turnover, and credit score
- Decide the loan amount and tenure based on business needs and repayment capacity
- Gather necessary documents like identity proof, business registration, bank statements, and income proof
- Fill out the loan application form online or at the lender’s branch
- Submit the completed application along with the required documents for verification
- Wait for the lender to review, approve, or reject the loan application
- Upon approval, review the loan terms, sign the agreement, and receive the loan amount in your account
Conclusion
Comparing business loan interest rates helps in choosing a loan that is affordable and suitable for the business. Evaluating interest rates, fees, and loan terms ensures better financial planning. Checking eligibility and repayment capacity before applying prevents financial burden and improves loan approval chances. Lenders offer different rates based on business stability, credit score, and market conditions. A well-researched decision could lead to lower borrowing costs and smoother loan repayment, benefiting long-term business growth.
