Learn Everything There Is To Know About Business Loan Interest Rates

Business loans are excellent financial instruments that help enterprises prosper in their new ventures and generate new revenue streams. Following the harsh economic conditions after the COVID outbreak, the RBI adopted prudent measures to keep the business loan interest rate under check.

Though many market sectors suffered a setback, RBI kept a consistently low reverse repo rate of 3.35% to encourage lenders to provide financial aid to seemingly profitable businesses. To understand how significantly this contributed to business loan interest rates in India, keep reading.

What Are the Types of Business Loan Interest Rates in India?

Mainly two types of interest rates are offered to businesses operating in India. These are as follows:

1. Fixed Interest Rate

It is levied on the borrowed sum and calculated evenly for the whole repayment tenure. Financial experts often refer to this concept as a flat rate of interest.

Evaluating the exact interest figures is relatively easy. All you need to do is visit the official website of your preferred lender and use their online business loan interest rate calculator.

Upon entering the correct details, the tool informs you of how much monthly payout you need to adjust per your chosen tenure. Getting precise numbers makes it easy to select a favourable tenure without disturbing your overall monthly budget.

2. Diminishing Interest Rate

Unlike the above concept, business loan interest rates finalised under this formula are revised monthly. The primary determinants affecting the monthly instalments are the outstanding principal and accrued interest.

As the principal gradually reduces each month, the interest rates also decrease. Virtual calculators allow you to track the repayment pattern of these reducing interest rates.

What Are the Possible Factors That Can Affect Business Loan Interest Rates?

A business loan interest rate rises when the RBI elevates the repo rate for banks. Such a planned course of action is mandatory to keep inflation in check and maintain the demand-supply balance.

When the inflation rate goes too high, the interest rates on all types of loans soar as banks need to profit by selling their loan products. But, other than this repo rate, some other factors also influence business loan interests which include:

• Nature of Business

When there is more significant risk involvement, the lender can either decline a business loan request or fix an elevated interest rate. The loan officers first evaluate the business cycle and determine whether its traded commodities will have an even demand throughout the year or if it is more of a seasonal affair. A combined outcome of these considerations is crucial in determining the business loan interest rate.

• Sanctioned Loan Amount

Naturally, the interest levied by the lender predominantly depends on the loan approved. Moreover, the method implemented in calculating the monthly payments also plays a crucial role in interest amount valuation.

For example, if you have opted for a fixed-rate business loan interest type, the interest imposed by the lending institution will be high. You have the right to negotiate for lower interest rates and should check for better deals online if you have a healthy credit score.

In order to perform CIBIL check online, visit CIBIL’s official portal, enter the name of the concerned entity, and provide a valid mail ID and password. Upon providing the OTP sent to your email, you will receive the detailed credit report via your registered email.

• Relationship with the Preferred Lender

Timely repayments and successful settlement of previous loans without faltering consolidate your relationship with the lender. Moreover, they improve your chances of grabbing customised loan terms and discounted interest rates, provided market conditions are favourable for such relaxations.

• Financial Standpoint of Your Business

Whenever you reach out to lenders for small to mid-scale business loans, they check all your financial documentation. These include balance sheet, cash flow, profit and loss statements, IT returns, etc. Performing these routine checks helps a bank or NBFC determine the ability of your business in repaying the outstanding amount.

If you maintain substantial surplus figures in business sales reports of a few previous quarters, you will likely receive loans at low-interest rates.

• Your Personal Creditworthiness

The personal credit score of a loan applicant is equally essential to their business’ creditworthiness if they plan to secure a commercial loan at an affordable interest rate. Hence maintain a flawless record of tax returns and pay off all previous obligations before applying for a new business loan.

If all your previous loans pile reach close to half of your previous year’s profit, then it is better to refrain from taking a new business loan. It increases the chances of loan rejection and hampers your CIBIL score due to too much dependency on loans.

Refinancing disrupted business proceedings has been quite a challenge for entrepreneurs as almost every sector suffered from lockdown effects. Lenders have strived to keep the market competitive with customisable business loan interest rate designed to minimise hardships. If you intend to benefit from such initiates, follow the good practices described here.