The smooth running of any business depends on proper and timely funding because unobstructed cash flow or credit flow is necessary for investment purposes as well as for working capital. You might fall short of funds at some time, at other times you might prefer to take a business loan while keeping your cash handy. Whatever the reason or requirement, business loans from financial institutions and other banks are essential to optimise both short term and long-term growth.
Why business loans?
Business loans are a preferred form of raising funds for businesses among other avenues such as promoter’s funds, venture capitalists, angel investors, public funding, etc. This preference is mainly due to the following reasons:
Options for a shorter or customized tenure of loans
Unlike equity, there is no need to give up or sell stakes
Interests paid on business loans are tax-deductible
Advance calculation and knowledge of interest to be paid in EMIs help in financial planning
Business loans work better for micro and small scale businesses
However, one of the major and sometimes the sole deciding factor for applying for business loans is the interest rate. At present, the competition among various banks, NBFCs, and government schemes have kept the business loan interest rate at attractive percentages which usually ranges from 15% to 24%. And better knowledge and proper research can help you to opt for a business loan that fulfils your funding requirements with in your budget
Types of business loan interest rates
There are two types of business loan interest rates in India. They are:
Reducing Rate: Here, the interest rate is adjusted per month based on the outstanding loan amount. Therefore, it is known as Diminishing or reducing rate of interest.
Flat Rate: Here, the interest rate is calculated on the entire loan amount, and the tenure of the business loan is also taken into account. The EMI does not diminish with the principal amount being paid every month, and thus, the business loan interest rate is flat.
The business loan type that suits you will differ according to your amount requirement, tenure involved, and of course, the interest rates payable.
Internal Factors Affecting Business Loan Interest Rates
Several internal factors affect the business loan interest rate paid by you and this could differ even with the same lender and the same types of loans availed.
Credit History:Credit score has emerged as a critical factor in securing loans at reasonable interest rates. Your credit record verifies that you are not a defaulter, pay your EMIs and credit card bills on time. All banks and financial lenders review credit scores before approving loans. The better your credit score, the better business loan interest rates you qualify for.
Company Tenure: Established businesses have a proven track record of handling credit. Unlike new businesses, they provide the lender with a sense of security, which translates into lower interest rates.
Business Type:Certain businesses are considered to have a higher risk factor. In such cases, notwithstanding the amount of business experience you have accumulated, the nature of your business leads to higher interest rates.
Monthly Revenue:Profitable or decent monthly turnovers assure lenders that repayment defaults are unlikely. Healthy business financials mean consistency in revenues and hence, a significantly comfortable loan amount and repayment terms.
Collateral:Business loans procured against sufficient collaterals reduce the risk for lenders and therefore, lower the interest rates on loan too. In the same vein, unsecured loans run into a higher rate of interests.
Lender Type:It is equally important to do market research and study of the loan provider, especially, their interest rate methods, other charges, processing fees, EMI policy, etc. Business loan interest rates differ from one institution to another vastly.
External Factors That Affect Business Loan Interest Rates
Factors that are not always within the control of the business can also impact the ongoing business loan rates. These generally pertain to the health of the country’s economy. Below are external factors affecting business loan interest rates
Monetary policies as decided by central banking authorities based on currency circulation, liquidity, etc.
Rate of inflation in the economy drive interest rates higher.
Global economic events have a domino effect that also bears on interest rates as the financial players of the economy, both organized and unorganized are interconnected.
If business operators keep close monitoring of the above factors, it is plausible that highly competitive and attractive business loan interest rates can be secured. With a performance-oriented business plan that focuses on growth quarter by quarter, businesses can secure excellent rates. Remember, to keep all documentation and records in order and opt for a suitable tenure linked with good interest rates and you can get a business loan at a lower interest rate.
Customized Business Loans
Certain financial institutes like Indifi, facilitate special loan schemes with attractive business loan interest rate for a particular business purpose or types of business requirements.These unique business loans include extension loan, equipment loan, investment loan and so on with special discounted rates and benefits.
Keep in mind these factors when applying and get the best business loan interest rates. You can also contact us for more information or assistance.