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6 Factors that Influence Your Business Loan Interest Rate


6 Factors that Influence Your Business Loan Interest Rate
6 Factors that Influence Your Business Loan Interest Rate

There comes a time when you require additional funds in your business for various reasons. This can include expanding to a new location, buying equipment, purchasing machinery, consolidating debt, restocking inventory, etc.

Utilizing your working capital for the above may not be the right way to go. Hence, you can avail a business loan.

Leading NBFCs offer up to Rs. 30 Lakhs and that too, within 24 hours of approval. You also don’t have to pledge an asset as these loans are collateral-free.

What matters the most when taking business loans is the rate of interest. These loans come with high rates as they are unsecured. On top of that, various business factors can have a positive or negative impact on them.

Here are a few internal factors that can influence the interest rates:

1. Credit Score:

The credit score is a crucial factor for availing unsecured business finance. You have higher chances of loan approval if you have a 750 or more CIBIL score.

Such a high credit score will also give you the power to negotiate the interest rates. The higher your CIBIL score is, the lower your rate of interest will be.

NBFCs like Bajaj Finserv give more preference to customers with such a score. The company provide loans up to Rs. 30 Lakh and within 24 hours.

2. Business Experience:

Financial institutions also take into consideration the experience you have in business. They need you to own a company that is at least 3 years old. Your business loan interest rate may reduce if you have a longer business vintage.

3. Annual Turnover:

The annual turnover of your business will have an impact on interest rates. High revenue may enable you to receive lower rates.

Lenders will require various financial statements like balance sheet, profit and loss account, and others as proof of income. Accurate documentation is a part of certain necessary information you need to apply for a business loan.

4. Loan Tenor:

Lenders might charge you higher business loan interest rate if you go for a long repayment tenor and vice versa. However, this will keep the EMIs low and vice versa.

Also, the total interest that you pay on a long tenor will be high compared to a shorter repayment time.

Consider an example where you have availed a loan of Rs. 10 Lakh at 12% rate of interest:

·   You have to pay Rs. 33,000 (approx.) EMI and Rs. 1.95 Lakh total interest if the tenor is 3 years.
·   You have to pay Rs. 22,000 (approx.) EMI and Rs. 3.34 Lakh total interest if the tenor is 5 years.

Hence, it is best to use a loan EMI calculator to determine the EMIs based on your loan amount, tenor, and rate of interest.

5. Business Plan:

You may have to produce a business plan when availing a loan. This plan will reflect how robust your operations are as well as your future business plans. An incoherent plan can be one of the reasons your loan got rejected.

Also, the plan may have an impact on the interest rates. The more detailed and feasible your business plan is, the higher chance you have to avail lower rates.

Other than the above, there are external factors beyond your control that might affect your business loan interest rate.

Some of these include:

I. Type Of Your Business:

Lenders consider some businesses as riskier than others. These considerations solely depend on them, and you have no power to change this.

They might charge you a high rate of interest even if they approve your business finance. Also, lenders might do the same if your business is considerably new.

II. Market Conditions:

The economy has a direct impact on the loan rate of interest. For example, high inflation can cause the rates to go up. Also, increased demand for loans will also escalate the rate of interest. On the other hand, deflation and low demand for loans will reduce the rates.

III. RBI Rates:

The Reserve Bank of India has various rates to control the lending powers of financial institutions. For example, the repo rate is the rate at which lenders borrow funds from the RBI. An increase in this rate will also increase the rate of interest of loans.

Make sure to address these intrinsic factors that determine the business loan interest rate to avail affordable financing.


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