Interest rates are one of the most crucial factors determining the overall cost of a business loan. Entrepreneurs considering a loan must familiarise themselves with business loan interest rates and the factors that affect them to secure the most feasible financing options for their business.
This article aims to provide an in-depth look into the factors that influence the interest rate of a business loan, along with practical tips for securing a loan with lower interest rates.
Top Factors Influencing Business Loan Interest Rates
Lending institutions take some primary factors into account before determining interest rates, such as:
Credit Score
The creditworthiness of the business significantly affects the interest rate offered. A higher credit score implies lower risk for the lender, which may lead to a lower interest rate, and vice versa. Both the business’s and the owner’s credit scores may be evaluated, depending on the lender’s policies and the applicant’s requirements.
Business Age and Financial History
Well-established businesses with a consistent financial track record are often viewed as less risky borrowers. Thus, the business loan interest rate may be lower for enterprises with strong financial stability and growth potential. On the other hand, startups or businesses with irregular financial histories may face higher interest rates.
Statutory Liability Payments
Lenders may assess your statutory liability payments such as taxes to determine the financial health of your business. Timely and consistent payments indicate financial credibility and reliability, which may ease the way to avail lower interest rates.
Loan Amount and Duration
Larger loan amounts are riskier for lenders due to the higher potential for default, which may result in higher interest rates. Similarly, longer loan tenures may also come with higher rates due to increased chances of default.
Lender Policies
Different lenders have varying policies and lending criteria, which may affect the interest rate of a business loan. Additionally, your existing relationship with the lender, such as a long-standing account or positive repayment history, may lead to favourable business loan interest rates.
External Factors Influencing Business Loan Interest Rates
Some external factors beyond your control may also influence business loan interest rates. Some of these include:
Business Sector and Type
Interest rates may vary for businesses in different sectors. For example, industries with higher capital risks – such as manufacturing or construction – may face higher interest rates compared to sectors like IT or consulting, which are considered less risky.
Location of Business
Interest rates may vary depending on the geographical location of the business. Factors such as local infrastructure, economic conditions, and regional market stability can impact the perceived risk and, consequently, the interest rate.
Market Size and Competition
Lenders may assess your business’s growth potential and stability based on its market size and competition. For instance, a small retail store in a highly competitive market may face higher interest rates compared to a niche business with lower competition but stable prospects.
Regulatory Environment
Industries within a strict regulatory environment, such as pharmaceuticals, healthcare, and finance, may be seen as higher-risk ventures due to the potential for regulatory changes or high compliance costs. This can result in higher interest rates for businesses operating in these sectors.
Reserve Bank of India (RBI) Policy
The RBI sets benchmark interest rates which directly influence the lending rates of financial institutions. Changes in RBI policies may affect the business loan interest rates.
Inflation
High inflation typically leads to increased interest rates, as lenders adjust rates to protect their returns against rising costs. Conversely, during periods of low inflation, interest rates may decrease.
Tips to Secure a Business Loan with a Lower Interest Rate
While some factors influencing interest rates of a business loan may not be completely in your control, there are certain steps you can take to get a loan with a lower interest rate:
Ensure a Healthy Credit Score
The credit score is one of the first things lenders assess when they consider a business loan application. To maintain a strong credit score, ensure you make timely payments on any existing debts and avoid maxing out your credit card limits.
Maintain Strong Business Performance
Demonstrating financial stability and growth prospects is essential for reducing the perceived risk in the eyes of lenders. If you can demonstrate steady income, profits, and opportunities for future growth, lenders are more likely to offer you lower interest rates.
Consider a Shorter Loan Tenure
Shorter loan tenures are generally considered less risky by lenders, which can result in lower interest rates. However, keep in mind that shorter tenures can increase your monthly payments. It’s important to ensure that the EMIs remain manageable for your business to avoid financial strain.
Apply for a Personal Loan
Self employed individuals with a small business can consider applying for a personal loan instead of a business loan. Reputed lenders like SMFG India Credit offer self employed individuals with loans upto INR 10 lakhs at attractive interest rates. It is advisable to check one’s eligibility by visiting the lender’s website before applying.
Negotiate with the Lender
Try to negotiate with lenders for more favourable terms, particularly if your business has a strong financial position and a good credit history.
Conclusion
Understanding business loan interest rates and the factors that influence them is essential for securing the best possible loan terms for your business. By improving your credit score, ensuring a strong business performance, and negotiating with lenders, you can improve your chances of securing a loan with favourable rates.
Additionally, well-known financial institutions such as SMFG India Credit offer a business loan EMI calculator. Potential borrowers looking for business loans can try out various combinations of interest rates, loan amounts, and loan tenures in the Business Loan EMI Calculator. This tool helps them determine the best EMI amount and tenure that suits their repayment ability.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.
