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30 Nov

How Do Business Loan Rates Work? Our Complete Guide

Business loans are fund support for startups, business expansion, premises extension, office equipment, and furniture. You need to consider several things for affordable business loans to get a capital cushion for the entity. One of the crucial determiners for business loan processing is loan rates and applicable charges.

Types of Business Loan Interest Rates

Rate of Interest

Banks and NBFCs charge an interest rate on the principal amount or the outstanding loan amount. In other words, you pay the interest amount as an extra payment above the principal amount. Lenders assess your loan eligibility, risk-taking capacity, source & stability of incomes, and accordingly set interest rate.

Interest rates are of two types:

Simple Interest Rate

It is a straightforward calculation of chargeable interest after considering the annual interest rate, amount of money borrowed, the timeline for repayment, etc.

Formula: Principal * Annual Interest Rate *Loan Tenure in Years

Compound Interest Rate

Compound interest recalculates repayment of the business loan on a monthly basis. The borrower pays interest on interest at compound rates of business loans.

Interest rate is the fundamental component of the business loan that decides the amount of money a borrower is supposed to pay monthly.

Annual Percentage Rate (APR)

Annual Percentage Rate is the cumulative cost of a business loan. It includes consideration of fees, charges, and all the applicable rates along with interest rates. Lenders use APR to assess the total cost of ending a business loan. APR calculates annual rather than monthly interest rates. You can consider this a financial charge.

Interest rates and APR both provide a basic calculation of rates to be charged upon the total loan amount. Lenders decide EMI and total loan amount based on these two mechanisms.

Also Read: Everything To Know For Businesses About Interest Waiver For A Moratorium By The Government

Factor Rate of Interest

Factor Rate is used for short-term loans and cash advance payments. It is also known as buy rate and generally charges in decimals such as 1.2, 1.4, etc. To derive the factor rate for the short-term business loan repayment rate, you can easily multiply the loan amount by the factor rate to determine the repayment amount.

Example: If you are taking a short-term business loan of 1 lakh INR at a factor rate of 1.35 percent, you can simply multiply 1,00,000*1.35 and get a total repayment amount of 1,35,000 INR.

Factor rates are comparatively expensive variants of loans.

Also Read: How To Get Items At The Best Rates For Your Kirana Shops

Charges with Business Loans

Banks and NBFCs charge different types of charges for business loans. Along with business loan interest rates, lenders charge several other charges and fees:

Origination Fees

Banks and NBFCs charge an upfront fee to process a new business loan application, known as origination fees. Lenders treat this fee as compensation against the application and processing of the business loan.

Origination fees include the cost of opening a new business loan account, while administrative expenses include phone calls, emails, interviews, and data entry. Lenders decide the charges as per their internal terms & conditions and hence vary from one lender to another.

Business Loan Application Fees

Traditional business loan processing involves a lot of paperwork where you visit the bank branch, submit documents, visit multiple times to finally get approval and disbursal of the business loans. It includes credit score checks, background verification, workplace or a property inspection, etc. Usually, Banks and NBFCs charge between 2.5 to 3 percent of the principal amount as the application fees.

Application fees are one-time upfront charges and are not refundable.

Guarantee Fees for Business Loans

Borrowers pay a sum of security money for a mortgage-backed loan, and lenders charge guarantee fees to shield against the risk of default and NPA. Banks and NBFCs bear the cost of processing and administrative expenses for the business loan application.

The arrangement could be a fraction of the loan amount or any other mutually decided between borrower and lender.

Also Read: Factors To Consider When Evaluating A Business Loan Offer

Late Payment Charges

When you delay payments post the scheduled date for EMI payments, lenders can charge late payment fees or around 2 percent monthly. The percentage is significant, especially if we calculate annually, that is 24 percent.

As a business loan borrower, you should always avoid late payment charges because it will create an unwanted financial burden for the next month, and it will keep increasing monthly.

Online Convenience Fees

We should also consider charges applicable online because digital lending has become a significant mode for business loan application and disbursal. If you are applying for a business loan online, you are liable to pay online processing charges, convenience fees, etc.

Lenders provide a user ID and password to each loan applicant. You can check the status on the official website or application on any digital device.

Prepayment Penalty

Banks and NBFCs charge a prepayment charge if you close the loan account before its tenure ends. You foreclose the business loan after paying the outstanding amount in one payment. Several banks have made it nil or negligible in recent years, especially to improve the financial market morale during and after the Corona pandemic.

Choose to foreclose after consideration of pending EMIs, interest amount, and tenure. If profitable, foreclose the business loan account, otherwise continue as scheduled.

Also Read: Follow These Steps to Get the Most Out of Your Business Loan

Underwriting Charges

Underwriter assesses your business loan eligibility and curates an offer that covers the interest of the lender and borrowers. The process checks the creditworthiness, repayment capacity of the loan applicant.

The underwriting mechanism may take a couple of hours to a few weeks, depending upon your profile, company’s financial situation, capital cushion, etc. Underwriter analyses your loan eligibility based on credit score, income (Salary or Business income), existing loans & liabilities, collateral, etc.

Conclusion

Business loans are fund support for startups, business expansion, premises extension, office equipment and furniture. You need to consider several things for affordable business loans to get a capital cushion for the entity. One of the crucial determiners for business loan processing is loan rates and applicable charges.

Also Read: Get an instant business loan in seconds! find out how!

Types of Business Loan Interest Rates

Rate of Interest

Banks and NBFCs charge an interest rate on the principal amount or the outstanding loan amount. In other words, you pay the interest amount as an extra payment above the principal amount. Lenders assess your loan eligibility, risk-taking capacity, source & stability of incomes, and accordingly set interest rate.

Interest rates are of two types:

Simple Interest Rate

It is a straightforward calculation of chargeable interest after considering the annual interest rate, amount of money borrowed, the timeline for repayment, etc.

Formula: Principal * Annual Interest Rate *Loan Tenure in Years

Compound Interest Rate

Compound interest recalculates repayment of the business loan on a monthly basis. The borrower pays interest on interest at compound rates of business loans.

Interest rate is the fundamental component of the business loan that decides the amount of money a borrower is supposed to pay monthly.

Also Read: 5 Tips To Improve Your Odds of Getting A Small Business Loan

Annual Percentage Rate (APR)

Annual Percentage Rate is the cumulative cost of a business loan. It includes consideration of fees, charges, and all the applicable rates along with interest rates. Lenders use APR to assess the total cost of ending a business loan. APR calculates annual rather than monthly interest rates. You can consider this a financial charge.

Interest rates and APR both provide a basic calculation of rates to be charged upon the total loan amount. Lenders decide EMI and total loan amount based on these two mechanisms.

Factor Rate of Interest

Factor Rate is used for short-term loans and cash advance payments. It is also known as buy rate and generally charges in decimals such as 1.2, 1.4, etc. To derive the factor rate for the short-term business loan repayment rate, you can easily multiply the loan amount by the factor rate to determine the repayment amount.

Example: If you are taking a short-term business loan of 1 lakh INR at a factor rate of 1.35 percent, you can simply multiply 1,00,000*1.35 and get a total repayment amount of 1,35,000 INR.

Factor rates are comparatively expensive variants of loans.

Charges with Business Loans

Banks and NBFCs charge different types of charges for business loans. Along with business loan interest rates, lenders charge several other charges and fees:

Origination Fees

Banks and NBFCs charge an upfront fee to process a new business loan application, known as origination fees. Lenders treat this fee as compensation against the application and processing of the business loan.

Origination fees include the cost of opening a new business loan account, while administrative expenses include phone calls, emails, interviews, and data entry. Lenders decide the charges as per their internal terms & conditions and hence vary from one lender to another.

Business Loan Application Fees

Traditional business loan processing involves a lot of paperwork where you visit the bank branch, submit documents, visit multiple times to finally get approval and disbursal of the business loans. It includes credit score checks, background verification, workplace or a property inspection, etc. Usually, Banks and NBFCs charge between 2.5 to 3 percent of the principal amount as the application fees.

Also Read: Importance of Accessibility In Getting Quick Business Loans

Application fees are one-time upfront charges and are not refundable.

Guarantee Fees for Business Loans

Borrowers pay a sum of security money for a mortgage-backed loan, and lenders charge guarantee fees to shield against the risk of default and NPA. Banks and NBFCs bear the cost of processing and administrative expenses for the business loan application.

The arrangement could be a fraction of the loan amount or any other mutually decided between borrower and lender.

Late Payment Charges

When you delay payments post the scheduled date for EMI payments, lenders can charge late payment fees or around 2 percent monthly. The percentage is significant, especially if we calculate annually, that is 24 percent.

As a business loan borrower, you should always avoid late payment charges because it will create an unwanted financial burden for the next month, and it will keep increasing monthly.

Online Convenience Fees

We should also consider charges applicable online because digital lending has become a significant mode for business loan application and disbursal. If you are applying for a business loan online, you are liable to pay online processing charges, convenience fees, etc.

Lenders provide a user ID and password to each loan applicant. You can check the status on the official website or application on any digital device.

Prepayment Penalty

Banks and NBFCs charge a prepayment charge if you close the loan account before its tenure ends. You foreclose the business loan after paying the outstanding amount in one payment. Several banks have made it nil or negligible in recent years, especially to improve the financial market morale during and after the Corona pandemic.

Choose to foreclose after consideration of pending EMIs, interest amount, and tenure. If profitable, foreclose the business loan account, otherwise continue as scheduled.

Underwriting Charges

Underwriter assesses your business loan eligibility and curates an offer that covers the interest of the lender and borrowers. The process checks the creditworthiness, repayment capacity of the loan applicant.

The underwriting mechanism may take a couple of hours to a few weeks, depending upon your profile, company’s financial situation, capital cushion, etc. Underwriter analyses your loan eligibility based on credit score, income (Salary or Business income), existing loans & liabilities, collateral, etc.

Conclusion

Banks and NBFCs charge different business loan interest rates and fees for loan processing and approval. We have mentioned prominent types and charges in the passage for your reference. Please read through the blog, browse the web, compare different lenders, and finalize a business loan that serves your requirement with flexible repayment options.

Also Read: 5 Tips To Improve Your Odds of Getting A Small Business Loan

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