If you as a small business owner want to take a loan for your business, whether it be for business expansion, to buy new machinery, to hire new people, for working capital, for inventory, etc, it always comes at a cost i.e. the interest rate the lenders charge for the loan. The value of the interest rate depends on the lender and the amount of loan the business owner has taken. The business owner should have a discussion with the lender/lending institution about the interest rate beforehand.
Here are some factors that affect the business loan interest rate:
1. The type of lender
Types of lenders range from banks, NBFCs, government schemes, and a few other informal lenders. The interest rate will depend on the high or low amount of risk that the lender has in giving loan to a small business owner.
The interest rate for banks and NBFCs can range from 13-21%. But can change depending on the loan tenure and amount.
2. Loan amount
Interest charged depends on the amount of the loan. Usually, for a higher loan amount, the lenders charge a high-interest rate, and for a low loan amount, low-interest rate. The loan amount once decided upon cannot be modified, but the interest rate can fluctuate. One of the reasons for this is the method used for interest calculation.
The method used for the calculation can also be negotiated with the lender.
3. Type of loan
The type of loan always plays an important role and affects the interest rate. Whether it is a loan with an asset or a loan without an asset, working capital loan or any other loan.
The best thing to do is to compare loans and the interest rates at which the loans are offered by different lenders and then decide on the one with a low-interest rate.
4. Business finances
Another factor that affects the interest rate of the loan is the financial status of your business. the financial statements like the P&L, balance sheet, cash flow statement, etc should also be kept up to date.
This helps in getting a lender who might reduce the interest rate.
5. Tenure of the loan
Loan tenure also affects the interest rate. If the loan tenure is longer, the business owner can negotiate on the business loan interest rate.
6. Structure of loan repayment
Different loan payment structures are available for a small business owner.
Interest can be calculated based on the reducing balance method i.e. the outstanding principal amount of the loan. In this method, the interest is higher but, there is more flexibility of funds.
Another method is the repayment of principal as early as possible. The time of loan repayment can change the interest rate and also the various combinations used for calculation.
Lastly, another method that is the flat rate method involves calculating the business loan interest rate on the initial principal amount without consideration of the principal amount to be repaid. This calculation can cause an increase in the EMI.
A lot depends on the method used for loan repayment calculation, so the right method should be selected.
7. The security which is given for the loan
In case of a loan where an asset is given as security for the loan, it can be seized if the business owner fails to repay the loan amount. If the asset is stronger and bigger, the business owner can bargain on the interest rate charged.
8. Credit score
An individual’s credit score also affects the business loan interest rate. The credit score describes the credibility of the person and the business in terms of loan repayment.
Higher the credit score, lower is the interest rate.
A credit score tells about the past loans, the payment records, credit card payments, existing debts, etc. The lender checks all of these factors before approving the business loan.
Interest rates can keep fluctuating, which can have an impact on the finances of your business.
Here is how interest rates can affect small businesses:
1. Business growth
Change in interest rate can affect the business growth plan. Interest rates can also affect the ability to get more funds for your business apart from affecting loan payments.
The high-interest rate can reduce the overall earnings of the business and therefore, the business growth.
2. Cash flow
If the business operates on limited cash flow, a high-interest rate loan can affect the business. Because, if the interest rates fluctuate and increase, the business owner should have some money to repay loans and debts. This can reduce the business income and the cost of assets making it difficult to sell them when required.
The debts a business has can also determine the impact of the fluctuating rates on the business. Businesses with variable loans, where the interest rates fluctuate may face issues.
Therefore, every business owner should consider these points before going for a high-interest loan.
Here’s how to get a low-interest business loan/Criteria for a low-interest business loan:
1. Credit score (personal)
The personal credit score shows how reliable you were with your personal debts. If you have been a responsible borrower, you will also be in paying back the business debts.
High credit scores make a good impression on the lenders because they get the assurance that they will get their money back.
2. How old the business is
Age of the business also has an impact on the interest rates the business will get the loan at. A new business or a startup is risky for the lender. Whereas an established business has a better chance of getting qualified for a low-interest rate business loan.
If the business has been operating since 3 or 5 years, it shows that the business has seen its ups and downs and is running and can sustain. Also, if the business has been active since these many years, it is capable of repaying for the loans.
3. Industry type of business
Another thing is the industry type. Some businesses belong to industries that are riskier than others for the lenders. The interest rate of the loan can also depend on the industry your business is in.
If you want a small business loan at an affordable rate, then contact Gromor Finance for unsecured loans up to 10 lakhs!