When it comes to growing your business, whether it’s launching a new venture, expanding operations, or managing your day-to-day expenses, securing the right financing is essential. One of the most common ways to do this is through a business loan. However, the actual cost of borrowing relates not only to the loan amount but also to the interest rate associated with it.
Interest rates on business loans can greatly impact your financial planning, as they determine how much you will repay over the life of the loan. A low interest rate can help you save significantly, easing the burden on your company’s finances.
Here we’ll look at business loan interest rates, how they’re calculated, and how you can secure lower rates.
The business loan interest rate refers to the percentage that the lender charges on the total loan amount. This rate is the cost of borrowing, as the borrower pays an additional amount on top of the principal loan amount.
The interest rate mainly depends on factors such as the type of loan, the amount borrowed, the repayment period and the purpose of the loan. This interest rate helps lenders compensate for the risks associated with lending money to businesses.
| details | details |
| Loan amount | Minimum – 50,000, Maximum – 10,000 |
| Possession | Minimum – 6 months, Maximum – 36 months |
| age | Minimum 23, maximum 58 (a companion is required if over 55) |
| interest rate | 19.99% to 26% annually |
| Processing fees | 2% to 2.99% + GST |
| Vintage business | minute. Two years |
| Office points | >=700, NTC allowed (with maximum loan amount specified) |
How to calculate interest on a business loan?
When applying for a business loan, it is important to consider the interest rate because it affects the total amount of interest paid during the loan term and the total monthly payment.
To calculate the amount of interest owed on business loans, you can use the following formula:
where,
F – The principal loan amount
R – Monthly interest rate (annual interest rate divided by 12)
N – Loan duration in months
For example, let’s say you take out a business loan of INR 1,00,000 at an interest rate of 12% per annum for 12 months. Here’s how EMI is calculated:
After solving the above equation, the monthly installment will be around INR 8,885 per month, with a total interest payment of INR 6,619. The total loan repayment will be around INR 1,06,619.
However, calculating interest manually may seem complicated. To make this easier, you can use the online EMI calculators offered by lenders, which will allow you to simply enter the loan amount, interest rate and loan tenure.
This will help you get accurate results and plan your money effectively.
Factors affecting interest rates on commercial loans
Depending on lenders and borrowers, there are several factors that can affect interest rates on business loans. Understanding these factors can help businesses secure loans at affordable rates. Here are some factors that affect business loan interest rates:
1. Nature of work
The sector your company operates in helps determine the interest rate. Lenders typically categorize loans based on whether a business falls into priority sectors or non-priority sectors.
Priority sectors, which contribute significantly to the economy but struggle to access finance, may often receive loans at lower interest rates. At the same time, companies in non-priority sectors may face higher interest rates because they have easier access to credit.
2. Longevity of the business
Lenders take into consideration the stability and sustainability of a business before setting interest rates. A business with a long history shows flexibility and consistency, which may lead to a lower interest rate. Lenders typically prefer businesses that have been in operation for at least six months, as more established businesses are considered less risky.
3. Business turnover
Lenders evaluate a company’s profitability and cash flows before lending it money. A business with consistent profitability and good turnover is likely to guarantee a lower interest rate. Due to the increased risk of default, higher interest rates may be offered to companies with volatile or negative earnings.
4. Credit score
Credit score is one of the most important factors that affect loan interest rates. A credit score of 700 and above is generally preferred because it reduces the lender’s risk of default. Businesses with higher credit scores are more likely to receive favorable interest rates, while lower scores may result in higher costs.
5. Loan amount and loan term
The size and term of the loan also affect interest rates. Larger loan amounts and longer repayment periods increase lender uncertainty, which can lead to higher interest rates.
6. Market conditions
Economic factors such as inflation, demand for credit, and broader market trends affect interest rates. During economic stability and low inflation, interest rates may be lower. However, during economic downturns or periods of high inflation, lenders may raise interest rates to mitigate risk.
How to secure business loans at low interest rates?
Here’s how to avail business loans at low interest rates:
1. Maintain a high credit score
Lenders generally prefer to lend money to applicants with a credit score above 700, which indicates good creditworthiness. To improve your score, ensure you pay bills and EMIs on time and avoid default.
2. Choose a shorter loan term
A shorter repayment term reduces the lender’s risk, which can help borrowers secure lower interest rates. It also helps reduce the overall borrowing cost.
3. Providing guarantees
Secured loans require you to mortgage assets, such as property or equipment, and interest rates are often lower due to lower risk for the lender.
4. Borrow from reputable financial institutions
Approved, experienced and RBI approved lenders usually offer competitive interest rates and better terms, ensuring you get a reliable deal.
5. Guaranteed stable income
Lenders usually prefer applicants with a steady source of income and a clear financial plan that demonstrates your business’s ability to repay the loan.
6. Avoid default
A consistent repayment history builds trust with lenders and can help secure loans at favorable interest rates in the future.
conclusion
Obtaining a business loan at a competitive interest rate helps maintain healthy cash flow and reduces the overall cost of borrowing. Business owners can effectively lower interest rates by maintaining a high credit score, choosing shorter terms, and providing guarantees. In addition, choosing the right lender plays an important role in ensuring favorable terms.
LoanTap, an RBI approved loan app, offers flexible business loans to suit your unique needs. With competitive interest rates, easy application processes, and customizable repayment options, LoanTap ensures you can focus on growing your business by leaving excessive borrowing costs behind. LoanTap Business Loans Providing a reliable solution to your financial needs.
Frequently asked questions
What is the difference between fixed and variable interest rates?
The fixed interest rate remains the same for the life of the loan, providing predictability. However, the variable interest rate can fluctuate based on market conditions, which may increase or decrease the cost of borrowing over time.
Can I negotiate the interest rate on a business loan?
Yes, it is possible to negotiate an interest rate with a lender, especially if you have a high credit score, strong business financing, or offer collateral.
What is the difference between APR and interest rate?
The APR includes both the interest rate and other associated fees such as processing fees, providing a more comprehensive view of the total cost of borrowing. The interest rate only indicates the cost of borrowing money.
Does the purpose of the business loan affect the interest rate?
Yes, the purpose of the loan, such as equipment purchase, working capital or expansion, can affect the interest rate. Loans for specific purposes, such as equipment loans, may have low, tailored interest rates.
What are the interest rates on small business loans in India?
Interest rates on business loans in India typically start from 12%, depending on the lender, loan type and creditworthiness of the borrower.
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