Know about the factors that affect small business loan interest rates

If you want to start or maintain a small business, a business loan becomes a necessity. The business loan can be a secured or unsecured, depending on the lender’s terms and conditions. If it is an unsecured loan, you do not have to keep any collateral with the lender and he will issue loans based on your credit score. A business loan interest would be high if lenders do not ask for collateral. If you had taken loans in the past and repaid it on time, then you would have a good credit score. Read on to know more about factors that affect small business loan interest rates.

Your small business loan interest rates will depend on certain factors that include:

  • Business credit score

This score would decide whether your business is eligible for receiving a loan. If the credit score is high, lenders may charge a lower interest rate.

  • Personal credit score

Your credit score as an individual depends on your earlier loan history, whether you repaid back the loans taken, any missed instalment, etc. Lenders can charge high interest rates if you have a bad credit score.

  • Research

While applying for loans, compare between online business loan in India by different lenders or banks and go for loans with low interest rates and favourable conditions. You can do this on individual lending sites or quotes comparison sites.

  • Duration of your small business

Lenders consider new businesses as having more risks while issuing loans than businesses that are already operating for a few years. This can lead to higher interest rates.

  • Business type

Certain businesses like restaurants, bars, food chains, travel agencies, etc. are considered by lenders to have more risks compared to others. So, the interest rates may go up.

  • Loan term

The loan duration or term also influences the interest rate. You will find that for a longer loan term, the interest rate may be low as the EMI (extended monthly instalments) are spread over a longer repayment period.

  • Collateral

If you keep a collateral or security with your loan, you will find that the lender may agree on a lower interest on the loan. In case you fail to pay back, he can claim ownership on the collateral.

  • Type of loan

Some types of loans, particularly for small businesses, charge low interest rates. A low interest rate on loans will help you to save your funds for the business and you may be able to close the loan sooner.

  • No Default on EMI

EMI or Equated Monthly instalment is the amount that you have to pay every month for your loan repayment. Pay your EMIs on an existing loan on time and do not miss any instalment. This would improve your chances of obtaining lower interest rates from the lender.

  • Refinancing

You may find that a lender is ready to offer loans at a lower interest rate after you have already taken some amount of loans from another lender. You may apply for the balance amount of loan at lower rates.

  • MSME business loan

MSME or Micro, Small, and Medium Enterprises aim at promoting businesses. This government sector may offer lower interest rates and easy repayment terms. But there are certain criteria that your business has to fulfil to avail this loan.

  • Vintage business or established business

If your business has been operating for a long time, the lenders have more trust on it. They may be willing to issue business loans at a lower interest rate.

You can follow the below tips in advance to get a lower interest rate:

  • Raise the credit score

You can have a good score by reducing your credit utilisation ratio which is the ratio of available credit limit and the credit limit that you have used. This can help in getting a lower interest rate.

  • Improve your business financials

A profitable business can help you obtain lower interest rates as the lenders consider the financial position of a company or business while issuing loans.

Before applying for loans, check the small business loan interest rates that you have to pay. Since these loans would have varying interest rates, do some research before you apply. There are certain other factors like your credit score, business history, etc. that would affect the interest rates. Take some measures to reduce the interest rates as you can save a lot of money in the process.

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