Looking to avail a business loan? Make sure you are aware of all the factors that determine the interest rate of your loan before you fill in the loan application form.
If you’re a small to medium business owner, start-up owner, or entrepreneur – then you would be aware of the lengthy, time-consuming process of applying for a business loan at a private or a public bank.
Generally, traditional lenders like banks are extra cautious when lending loans to businesses. A lengthy approval process, miles of paperwork, tight loan repayment schedules, and high prepayment penalties – are some of the woes faced by business owners.
However, all that has changed, thanks to the arrival of non-banking financial corporations and the rise of FinTech. Today, it’s easier than ever before for businesses to borrow small-term business loans.
Interest Rates – The Deciding Factor of your Business Loan Burden
With that said, there’s still one major hurdle to cross before you secure the finance – interest rates. With the increase in the number of lenders, interest rates have come down a bit. However, the interest rate varies from one borrower to another. There are plenty of factors at play that determines the final interest rate you are charged.
Here, in today’s article, let’s take a look at the various factors that determine the interest rate of your business loan.
Factors under Your Control
- Business History
Your time in business plays a role in determining the interest rate. For instance, if you have well-established enterprise, that’s been in business for several years, lenders are likely to offer you lower interest rates. This is because they have proof of the performance and stability of your business, and are willing to take risks on you.
On the other hand, if you’re a new enterprise, or if you’re about to start, then interest rates may be slightly higher. This is one of the main reasons why new businesses and start-ups find it extremely difficult to avail funding in India.
Remember that, you have higher chances of getting your business loan approved at nonbanking financial corporations compared to traditional banks.
- Credit Score
This is the overall financial report of your business. If you have a higher rating, then you are likely to be offered better interest rates. Experts recommend that you work on boosting the credit score of your business, before applying for a loan, to get better terms. Repaying existing loans, optimising the cash flow are some of the ways to boost your credit score.
- Profit / Loss Statements
Lenders request you to share the recent financial reports of your business before approving the loan. If your business is healthy with adequate revenues, then you are likely to enjoy lower interest rates.
- Business Plan
All lenders require you to share your proposed business plan while you apply for the loan. This is a brief about how you plan to use the borrowed funds. If you don’t have a solid execution plan, then you may be charged higher interest rates, or in the worst case, your loan application may even get rejected. So, make sure you draft a detailed plan before approaching the lender.
- Type of Business Loan
Just like all other loan products, the interest rates depend on the type of business loan you are seeking. Generally, unsecured business loans (loans without collateral) have higher interest rates compared to secured business loans (where you pledge a property or other asset as collateral).
Factors Beyond your Control
These are external factors that you have no control over. These include:
- Prevailing Inflation Rate
If inflation rates are high, then the interest rate of your business loans also shoot up correspondingly. The reverse is also true. If the rupee is enjoying a strong run, then you can expect your business loan interest rate to drop down.
- Policies of the RBI
The RBI plays a crucial role in determining the cash reserves in the market. If the RBI relaxes the leash, then the cash supply in the market increase, which in turn decreases interest rates. On the other hand, if the RBI tightens the leash, then you can expect interest rates to shoot up.
That’s it. These are the major factors that determine the burden of your business loan. While the last two factors are beyond your control, you can get the first five factors working for you. Make sure to get this right, to enjoy lower interest rates, thereby lowering the burden of your loan.