Business loan interest rates: Factors affecting, types and how to apply

Business loans are usually taken by entrepreneurs who want to expand their existing business or start something fresh.

Funding aggressive growth has always been a priority for young entrepreneurs, although availing loans can also relate to several risk factors.

The existing interest rate is one of the most important factors determining the decision to undertake a bank loan.

However, according to experts, availing of business loans in India can also depend on several factors.

Contextual factors related to the country's overall economic progress coupled with the start-up's credit score. 

Before we delve into the further intricacies, let’s look at the following.

Factors Affecting Business Loan Interest Rate

Before applying for a business loan, let’s examine some of the factors influencing the interest rate/s.

1. Credit Score

Does your business credit score influence the interest rate on a business loan taken? It is quite interesting to note that credit score within a business can be a good indicator of the borrower’s creditworthiness. 

Not only that, your business's credit score can also be a well-drawn indication of your repayment capacity.

Readers must understand that a low credit score can reflect a high-interest rate when taking out a business loan.

The same is applicable when applying for a collateral-free business loan. 

Therefore, keeping an optimal credit score should be the best strategy to minimise the risk while making a business loan application.

2. Benchmark Calculation

The benchmark calculation can be understood as a standard for disbursing loans while calculating a relevant interest rate. 

Banks usually follow the ‘London Interbank Offered Rate (LIBOR)’ or its Indian version. 

A similar benchmark calculation is done via the Mumbai Interbank Offered Rate (MIBOR),

3. Loan Tenure

Loan tenure can be one of the most critical factors in deciding the interest rate for a business loan. 

Long- term loans have a longer tenure for repayment schedules; hence, higher interest rates. 

For short-term loans, the opposite is true. However, financial consultants acknowledge that entrepreneurs can use an online EMI calculator to make a correct estimate!

Types of Business Loan Interest Rates

Do you know that a specific type of loan has a particular interest rate? Business loans can be classified according to types, such as secured and secured business loans. Secured business loans are relatively less risky as collateral can be seized if not repaid. 

By the various types of business loans available, classification can be given as follows:

● working capital loans,

● machinery loans,

● startup loans, a business credit

The type of Business can determine the interest rates, too, as far as business loans are concerned; for businesses operating in the manufacturing segment, tangible assets like machinery and equipment can work out as valid collateral to secure a business loan. 

On the contrary, businesses in the service sector have little to offer, as entrepreneurs acknowledge that collateral-free loans are often applied for and have high-interest rates.

How to Get the Best Business Loan Interest Rate?

If you ask us how to get hold of less risky business loans, we suggest you go through the following points.

✔ You can acquire a low-interest-based business loan if your business has a stable credit score.

✔ Businesses having a good cash inflow can attract low-interest-based business loans.

✔ Preparing a detailed business plan can help secure loans with a lower interest rate.

✔ Long-term business loans are more viable as uncertainties are mitigated to yield low-interest business loans. 

Summing up from the above, the interest rates for business loans vary according to various factors. 

Do you know that the best way to acquire a low-interest business loan is to apply through a NBFC? Experts explain that NBFCs do not fall under the ‘Prime Lending Rate regime’ laid down by the Reserve Bank of India.

This gives NBFCs an advantage in offered rates of interest. Moreover, it has been proved that NBFCs offer highly competitive interest rates. They supply valuable credit facilities at a low rate.