Business loans are ideal for accessing quick credit needed to meet day-to-day working capital requirements as well as fund expansion operations. However, when you apply for a business loan, you have to pay interest on the amount of credit borrowed from the lender. Business loan interest rates determine your total cost of borrowing and can vary from one lender to the next. Generally, business loan interest rates in India start from around 8.50%, while some lenders like Lendingkart offer business loans starting from just 1.25% per month. Moreover, business loan interest rates are not homogeneous even at the same lender. This comprehensive guide on business loan interest rates offers you a thorough understanding of the various types of interest rates, factors affecting business loan interest rates, and offers tips on how to secure credit against low interest rates.
Types of Business Loan Interest Rates
In India, lenders primarily offer two types of business loan interest rates – fixed interest rates and floating interest rates. As the name suggests, fixed business loan interest rates remain fixed throughout the loan tenure. Therefore, the EMIs payable also remain the same. If you opt for a fixed interest rate business loan, you can easily compute your monthly payments using a business loan EMI calculator tool.
For floating business loan interest rates, the applicable rate of interest varies according to the RLLR or Repo-Linked Lending Rate. RLLR is determined by the Reserved Bank of India. Since the interest rate applicable on the loan varies, the EMIs payable may also change during the loan term.
Factors Affecting Business Loan Interest Rates
Business loan interest rates depend on a range of different factors. Understanding these factors can help you avail an ideal business loan:
Credit Score
Lenders review your credit score to determine business loan eligibility and interest rates. Your credit score sums up your past repayment history and helps the lender ascertain your creditworthiness. Maintaining a high credit score of 750 and above indicates responsible credit practices, making you a less risky borrower. Therefore, lenders are generally willing to offer you credit against low business loan interest rates.
Type of Business
Business loan interest rates also vary depending on the nature of the business seeking credit. Lenders assess the industry the business operates within and the current market conditions prevailing in this industry to understand the risk associated with lending it capital. Business loan interest rates can vary depending on the level of competition in the industry, the potential for changes in demand, etc. For instance, businesses operating within a highly competitive industry may face high business loan interest rates as compared to ones operating in industries with a lower level of competition. Similarly, lenders can charge a higher business loan interest rates for cyclical businesses as compared to ones that have stable demand throughout the year. Simply put, certain businesses may be more volatile to demand shifts and other economic changes, increasing the chances of compromising their repayment capacity.
Loan Tenure
Business loan interest rates also vary depending on the tenure of the loan. Generally, loans with a longer tenure come with higher interest rates as compared to business loans with a shorter tenure. Lenders charge higher business loan interest rates for longer durations due to the higher risks of the possibility of market fluctuations. A higher business loan interest rate helps compensate for the higher credit risk involved.
Collateral
Collateral can also impact business loan interest rates. Applicants who offer collateral for the loan may be able to secure the credit at lower interest rates. Collateral acts as an additional safety net for the lender reducing the overall lending risk. In case of default, the lender can sell off the pledged collateral to recoup the loaned amount.
Business Income
Business income is an important variable in the business loan interest rate computation process. Lenders consider the loan applicant’s business income while setting interest rates. Generally, most lenders list basic annual turnover requirements as eligibility criteria for availing business loans. A higher business income indicates a better repayment capacity, posing lower credit risk for the lender. Therefore, lenders may be willing to offer business loans at lower interest rates to businesses that can demonstrate profitability and a consistent cash flow.
Business Vintage
The number of years the business has been operating also plays a critical role in determining business loan interest rates. Business vintage is essential because it shows the lender that the business has sustained itself through market fluctuations. Generally, lenders prefer to offer credit to established businesses with at least 2-3 years of financials and credit record. Therefore, the longer the business has been operating, the higher its chances of securing low business loan interest rates.
How to Secure a Business Loan At Low Interest Rates
If you require credit to expand your business venture or obtain working capital for day-to-day expenses, you might be looking for ways to keep business loan interest rates low. Here’s a few handy tips to help you secure a business loan at low interest rates:
- Maintain a credit score of 750 and above. Make timely EMI payments, reduce your outstanding loan obligations, and avoid defaulting on loan payments to boost your credit score and obtain favourable business loan interest rates.
- If you have the required collateral available, try obtaining a secured business loan. This will make you eligible for a favourable business loan interest rate as well as higher loan amounts.
- Compare loan offers before selecting a lender to ensure you get the best business loan interest rates. Utilise a business loan EMI calculator tool to compare business loan interest rates offered by various lenders and ensure that the rate is within your affordability threshold.
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Conclusion
This guide on business loan interest rates summed up the various factors impacting interest rates in India. Understanding how factors like your credit score, nature of business, loan tenure, collateral availability, business financials, and business vintage can affect rates is critical, especially if you are about to apply for fresh credit. Evaluating these factors carefully can help you secure business credit at lower rates to meet business growth needs while saving money in the long run.
