What is a Business Loan, and the Interest Rate?
Business Loans are useful tools in any entrepreneur’s arsenal, whether they have just started, are looking to grow their revenues, or trying to expand their presence. However, before applying for one, remember that unlike venture capital and grants, borrowers need to repay it to the loan provider with interest. Whether an SME owner borrows a private or a government Business Loan, interest remains an integral part. The difference in the interest rates may result in cost-saving and financial growth or unnecessary costs that add up over the loan term.
Since the interest rate is a significant consideration while determining the best loan offer, a solid business plan is essential to maximise the value of the full amount borrowed. Here is an entrepreneur’s guide to Business Loan interest rates.
Business owners often need to raise capital to invest in various dimensions, such as staff, marketing, workplace, product line, inventory, and equipment. The most common funding options in this regard are Venture Capital (VC) and Business Loans. While VC funding requires the entrepreneur to provide a stake in their company to the investor and reduce their control over the business, an instant Business Loan is an ideal choice that provides the required capital without claiming any stake or control in the company.
Business Loans are loan products that offer SME owners the required capital, which they must repay within a set tenure with interest. When an entrepreneur borrows a Business Loan from a lending institution, it comes with a charge called the interest rate over and above the borrowed principal amount. It is a percentage of the loan amount the business owner borrows.
The lender divides the total payment into monthly EMIs comprising a portion of the principal and interest amounts. After getting a loan, the borrower is legally liable to repay the loan with interest to avoid any penalties and default.
Factors Affecting the Interest Rates
Numerous factors affect Business Loan interest rates, and understanding them properly is important to getting an excellent loan deal. Some of the determining factors include the following:
- Nature of Business: The business nature, past activities, and financial performance largely affect the Business Loan interest rates. Lending institutions classify Business Loans into priority and non-priority sectors. Businesses in the priority sector include those that highly contribute to the country’s GDP but do not get Business Loans easily. If they qualify for a government loan under a Business Loan scheme, they get easier loan approvals at lower interest rates.
- Principal Amount: The principal amount is the most significant factor that affects the Business Loan interest rates. Consequently, the bigger the loan amount, the higher the interest outgo. Some loan companies also have higher interest rates on big loan sanctions due to the higher risk involved.
- Credit Score: The applicant’s personal and business credit score largely determine their creditworthiness, providing a way for the loan provider to ascertain their repayment capacity. Those who have previously taken credit and repaid it responsibly on-time build a good credit score that lenders prefer. A decent credit score is crucial to getting a Business Loan at low-interest rates. The higher the score, the better the chances of getting an instant Business Loan at low-interest rates.
- Business Existence: The number of years in business operation largely affects the interest rates. The business vintage represents how well a business has sustained in the past, especially during tumultuous market conditions. The longer the company has been in the industry, the lower risk it involves, and it qualifies for a better loan deal. That is why most lending institutions require a business to exist for at least a few years to be eligible for a loan.
Types of Business Loan Interest Rates
Interest rates on Business Loans can be fixed or floating. A fixed interest rate remains the same over the loan term, allowing the borrower to make the same EMI payments month after month. A floating interest rate changes during the loan term according to the market rate. If the RBI decreases or increases the repo rate, it will also change individual borrowers’ business loan interest rates. Let’s look at their salient features.
Fixed Interest Rates:
- Involve lower risk to the borrowers
- Give the advantage of predictable EMI payments
Floating Interest Rates:
- Involve higher risk to the borrowers
- Monthly EMI payments fluctuate if the market or repo rate changes
How to Compare Business Loan Rates?
While looking for a private or government Business Loan, the best way to compare interest rates is to check the APR (Annual Percentage Rate). Apart from the interest rate, the APR also includes the origination fee, underwriting fee, closing costs, loan guarantee fee, etc. However, not all loan providers use APR to quote their loan-related costs.
Read more:- Understand the Benefits of OD Loan for Business
Aspiring borrowers should always try to calculate APR to understand the loan costs better. It also eases the product comparison process from various lenders, allowing the borrower to get the best loan plan for their business.
How To Get A Low-Interest Business Loan?
Business owners looking for low-interest Business Loans must follow these tips:
- Maintain a decent credit score
- Never default on interest payments to build a good credit history
- Develop a consistent income source with a solid financial plan
- Get discounted rates by applying for a loan under a government Business Loan Scheme
- Use online calculators and other tools to get affordable interest rates and EMIs
Fulfilling the capital requirement is crucial to a business’s successful operations, which owners can fulfil through an ideal Business Loan plan. They can be the go-to funding option to satisfy all business needs. However, getting one at a low-interest rate ensures the repayment does not become a financial burden.
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