Every business owner requires funds for the business to grow. A business loan is one of the best options to go for in such a case. Every business loan has an interest rate attached to it, and it depends on the lender or the type of institution you choose, tenure of the business loan, etc. Some lenders offer loans at low interest rates and some at high-interest rates. So, a business owner should always discuss the interest rates and the terms and conditions for the same with the lender beforehand.
Since the business loan has to be repaid, the business loan interest rate would determine how much the small business owner needs to pay.
So how do you make sure you are being charged the right interest rate?
Here are some factors you should know that affect a business loan interest rate:
1. Nature of the lender
There are many types of lenders like banks, NBFCs, and a few other informal lenders. The interest rate will be higher or will increase depending on the amount of risk for the lender.
Usually, the interest rate charged by banks and NBFCs ranges between 13% and 21%, but generally, depends on factors like the loan tenure, loan amount, etc.
2. Amount of the loan
The interest that is charged depends on the principal. Higher the loan amount, higher the interest rate charged. the loan amount cannot be modified, but the interest rate can change. This also depends on the method used for calculating interest.
If the diminishing balance method is followed, the interest is charged on the outstanding part of the principal. If it is a flat rate throughout, it can be more expensive. This can be negotiated with the lender.
3. Type of loan
The nature or type of loan also has an impact on the interest rate. May it be a working capital loan or a loan which has an asset included with it.
The best way is to compare and contrast the different lenders and what they offer. This will help in selecting one with a low-interest rate.
4. Financials of the business
Another important factor that affects the interest rate of the loan is the financial status of your business. Whether your business has an organized system or not. The quarterly and annual financial statements like the profit & loss statement, balance sheet, and cash flow statement should be updated and accessible.
Ensuring this helps in attracting a potential lender who reduces the interest rate.
5. Loan tenure
The interest rate also depends on the loan tenure. Longer the period, the easier it is to negotiate for a low-interest rate.
6. Repayment structure
There are different repayment structures for loans nowadays. There is no principal repayment for a certain period after the loan disbursal during this time only the interest is paid. After the principal repayment begins, interest can be calculated based on the reducing balance method i.e. the outstanding principal. In this method, the interest might be higher but, there is more flexibility of funds.
Another method is the repayment of principal as early as possible. Different permutations and combinations can change the interest rate and also the time of payment.
Whereas, in the flat rate method, the business loan interest rate is calculated on the initial principal amount without considering the principal which is repaid. This method calculation results in a higher EMI.
So which method you should choose?
- For Flat Rate Method, the interest rates offered are generally lower than that of the Reducing Balance Loans.
- The interest paid for the Reducing Balance Method reduces over time; that is why the amount of interest paid for this type of loan is generally less than that for a Flat Rate Method.
- The loan tenure of a Flat Rate loan is usually longer than that of the Reducing Balance loan.
Choose a method which suits your needs.
Fluctuating interest rates can have a huge effect on your company’s progress.
Here is how interest rate affects a small business:
- Interest rates not only affect loan payment but also affect the ability to get more funding. High-interest rates reduce the overall earnings and therefore can hamper business growth.
- But the falling interest rates make a business loan more affordable.
- High-interest rates can have a negative impact on small businesses, and therefore when the interest rates rise, small business owners must set aside some money to repay loans and other debts. Going for higher interest loans can also lower the cost of the assets, making them harder to sell for capital, if required.
- The amount and type of loan business take can determine the impact of fluctuating loan rates on the business. Small business owners with fixed loans may not suffer when there is a rise in the interest rate, but businesses with variable loans, where interest rates fluctuate may have a hard time.
That is why small business owners should refrain from going for loans with high-interest rates.
If one wishes to go for a low-interest loan, one must qualify for the same. Here are the criteria:
- Your personal credit score plays an important role in showing that you will be a responsible borrower and will pay back the debt. If the credit score is high, it signifies that the lender is likely to get the money back.
- The number of years a business has been active also plays an important role in the interest rate the business owner would get on the loan. A new business is always risky for the lender; therefore, an already established business will qualify for a low-interest rate loan more than a new establishment.
- If your business has been active since at least 2 to 3 years, there’s a good chance your business will be able to stay in the market and also will be able to make loan repayments.
- The industry your business is a part of also plays an important role. If you are in an industry which is perceived to be safer, you might have a better chance at qualifying for low-interest loans.
If you are looking for low-interest-rate loans for your business, contact Gromor Finance for quick loans at attractive interest rates!