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Introduction
Applying for a business loan through an NBFC or a bank is one of the ways to grow your business. The interest rates charged on the availed business loans are highly dependent on the overall cost of the borrowing. An MSME owner may find some difficulties in repaying the amount in case of higher interest charges. Knowing the various factors that affect interest rates on business loans can help you in better preparation before applying and could probably help to get a lower interest rate for your business loan.
Different Factors Affecting Your Business Loan Interest Rate
1. Credit Score
Whenever you apply for a business loan, lenders check your credit score as a standard practice. A good credit score will make it more likely for lenders to give business loans with interest rates and terms more favorable to you. Similarly, low credit scores will decrease these advantages by further lowering the chances for loan approval. A low credit score also indicates that you are a highly risky customer who might not be able to repay the borrowed loan amount.
2. Business Financial Health
All of the lenders review your financial statements, including income, balance sheet, cash flow statements, and other related files to know the financial status of your business. Stable financial health is indicated by maintaining a strong cash flow, the ability to manage unexpected expenses, and repay any loan you have borrowed. If these factors are not well-maintained, it indicates poor financial health, which can negatively impact your business loan interest rates to go high and also affect the overall business loan approval as well.
3. Loan Amount and Term
In general, availing a large amount of business loan at once reduces interest rates because that impacts you to scale your business largely, while smaller loans are riskier and hence have a higher rate and longer tenure. The tenure of the loan impacts the rate of interest, too. Most short-term loans usually carry a higher rate of interest because they are more risky for the lender where the EMI amount could be higher and might not be affordable to pay by the borrower over some time. On the other hand, interest rates for long-term loans are typically low as their total cost of borrowing is high.
4. Collateral
Common forms of collateral include property, business equipment, inventory, machinery, etc. Loan without any collateral or pledging any of your assets makes unsecured loans more risky for the lender to believe and provide you with a loan resulting in increasing in the interest rates for such loans. It would be helpful to you to offer collateral if at all possible to cut your interest rate. Interest rates on secured loans are lower, compared to unsecured business loans.
5. Industry Risk
Lenders consider what type of industry in which your business operates to assess the potential risks associated with lending to you. They check the stability of your business, historic performance, whether your business comes under a highly competitive category, etc. Based on this they evaluate your business loan. If any of the above factors are considered by the lender which affects you in a bad way, then there might be a chance of an increase in the interest rate with the loan provided for your business.
6. Lender’s Policies
Policies of different lenders, to offer a loan may vary, and these may affect the interest rates charges as well. Whether traditional banks or NBFCs, each has its own criteria and guidelines in place for loan applications and their interest rates. Knowing more and comparing offers from multiple lenders will help you get the best rate for your business. Sometimes, having good relations with the lender might result in good terms and offer favorable interest rates.
7. Business Experience and Management
The experience and capability that your management team has, or that you carry as a business owner, can also affect your loan interest rates in a good way. In general, if you have a highly skilled and experienced team, or if you, as a business owner, have good experience in running the business, then the lender may charge a reduced interest rate since the chances of the business succeeding and paying off the loan on time are high with a capable team. You must show your business plan, proof of successful operations, and a strategy for growth to the lender. Then you may qualify for lower rates while you apply for business loan.
8. Loan Purpose
The purpose of the loan might also have an effect, because the lender will consider how the borrowed money is used in the business and, therefore, calculate a possible return on the investment. Loans for the expansion of operations, the purchase of equipment, or even refinancing already existing loans are most likely to have different rates compared to loans for working capital or covering unexpected expenses. All of that makes the purpose and benefits of the loan clear to get a better interest rate.
Conclusion
These are some factors that affect the interest rates offered on business loans, and being aware of them can highly help you get a better deal. Right from the maintenance of a good credit score and financial health to offering collateral and having a skilled management team, every single factor plays an important role in the process of a business loan which could help you in getting the business loans at lower interest rates from the lender.
Keeping these factors in mind, NBFCs are good options for obtaining business loans since they are very supportive to MSMEs by providing loans without needing collateral and digital application, EMIs payments etc are some of the added additional advantages which makes NBFCs one of the most preferred options for business loans.
