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What affects Interest Rates of Business Loan?

Sheena Sharma
What affects Interest Rates of Business Loan?

Business Loan interest rate generally starts from 14.99% onwards per annum. But there are other factors also which influence the final commercial business loan interest rates. These include applicant’s profile and creditworthiness, business plan, credit score, required loan amount, repayment tenure, business vintage and profit along with other financial aspects. 

There are some factors which influence the Business Loan Interest Rate. These are as follows: 

Existence Period of your Business 

It is compulsory for your business to be in business operations for at least 2 years to get a business loan no matter what its nature is. In fact, with more years in business, you can have a higher possibility of getting loans at lower interest rates. 

Your Business Profile 

Financial institutions consider business credibility when lending business loan for small businesses. This includes details like the number of years a business has been in existence, a business owner’s profile and other such factors. Hence, it is important for you to have a solid Business Profile. Some lenders offer separate business loan in Indore to buy equipment and expand the business.

The Monthly Turnover 

Your monthly turnover will obviously keep fluctuating but it is what decides if your business is making a profit or incurring losses. This is a key factor in determining your eligibility to avail a business loan for MSME. Hence, it is very important for you to maintain consistency in your turnover. 

Your Credit Score 

Credit Score which is based on your credit history evaluates your creditworthiness. Having a good Credit Score works in your favor when applying for a business loan. Additionally, it also gives you benefits like flexible tenure, repayment terms, instant and hassle-free card approvals and lower interest rates. 

The Collateral or Security 

Collateral is the security that you pledge to the lender to avail a loan for MSME. The higher is the value of your collateral, the more benefits you get. Valuable collaterals like Equipment, Real Estate, Machinery, Deposits and Home Equity give security to your lending authority. You can also get a higher loan amount since the risk is low in such cases.  

The Repayment History 

When evaluating your loan application, there are some questions which are considered. Like, have you ever taken a business loan such as an equipment loan, a working capital loan or any other similar business loan for your business? How did your payback for such a loan? Did you pay your EMIs on time? 

In such a scenario, what boosts your chances of getting a good low-interest business loan is staying on top of your EMIs and not being a defaulter on any of your prior or existing loans.  

The Nature of your Business 

Financial Institutions usually avoid lending to businesses which are involved in high-risk activities. In such cases, they may either charge you with a high interest rate or turn down your application. 

This can be the case if you deal in a business whose market demand is seasonal or operate in a business where the working cycle fluctuates according to the market conditions. 

Along with this, Loans are basically classified under Priority Sector and Non-Priority Sector. Hence, Loans which fall under the Non-Priority Sector have a higher rate of interest as compared to the Priority Sector Loans. So the nature of your business also plays a role in the determination of the interest rate on your business loan. 

Business Finances and Revenue 

Financial institutions when lending small business loans check the business’s cash flow, balance sheet, profit and loss statements. These factors are crucial for them to determine the viability of your business. 

So it is very important for you to keep your sales report and projection handy. Sales Reports give an idea about the business revenue and hence, having a strong business financials boosts your chances of acquiring a low business loan interest rate in India.  

Your Business Plan 

It is crucial for you to have a solid business plan created which outlines your vision, objective and future business actions. This has a direct relation with the business loans interest rate.  

Especially if you own a start-up or a small business seeking loans, it is very important for you to satisfy your lending authority with your business plan. 

The Type of Lender 

Business Loan interest rates differ from one lender to another. For example- Banks usually levy lower interest rates as compared to NBFCs.  

Your Relationship with the Lender 

If you are taking a loan from someone you know personally, the business loan interest rate depends upon the relationship you have with the lender. If you are an existing client who has demonstrated loyalty to the lender by paying your debts on time, you might be able to get better loan interest rates and terms.  

Here are some things that you can do to avail a Business Loan at a Low-Interest Rate: 

If you want to avail a business loan at a low-interest rate, you should consider the suggestions and techniques mentioned below- 

  • Focus on improving your credit score and make it above 750 
  • Improve your creditworthiness by paying EMIs, bills and credit card payments on time 
  • Do NOT close your old bank accounts or credit cards 
  • Apply for a loan only with top public or private sector banks 
  • Maintain a decent source of income 
  • Apply for a long-term business loan instead of a Short-term loan  
  • Maintain financial stability with a good loan repayment history 
  • Build a relationship with the bank and open an account with them 
  • Offer to submit valuable collateral or security to get a secured business loan 

Final Thoughts: 

If you are thinking of applying for a business loan, it is crucial for you to understand the different aspects which affect the interest rate on a business loan without security. 

All in all, the best way to get a Loan for MSME is through the Credit Guarantee Fund Trust for Micro and Small Enterprises Scheme. The Ministry of Micro, Small and Medium Enterprises has introduced this scheme to ensure that the new and already existing MSMEs can get loans of up to 1 crore without any collateral.

Sheena Sharma
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