Things you must know about business loan interest rates

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Things you must know about business loan interest rates

Business loans in India are designed for small and medium enterprises in the country. All businesses can avail of the loan to cover their ongoing business expenses and to make a capital expenditure. The loan can work like a personal loan that you can use to cover the costs like working capital, inventory purchase, salaries, office lease, and marketing campaigns. The loan is available for all existing businesses that want to expand and grow. The rate of interest will depend on the loan, lender, and many other factors. Lenders offer the loan at competitive interest rates so it is best to compare different lenders and find the one that best suits your repayment capacity. 

The interest rate on the business loan is a crucial factor. It can have a huge impact on the total cost of borrowing which is why borrowers like to choose a lender that offers the loan at low interest. Let us take a look at a few things you need to know about the business loan interest rate. Read also Wiliams Loans Putney Equity Release Rates

  •  Loan type

You will find different types of business loans available in the market. These include short term loans, long term loans, secured loans, unsecured loans, and more. You must choose the loan type based on the rate of interest applicable on the loan. It helps to compare the terms of the loan and understand the interest rate and its impact before you choose one.

  1. Nature of business

There are some businesses that have more risk factors than others and the lender will take this into account. So if you own a business that is high risk in the industry, you will have to pay a higher interest rate on the loan. The lender will adjust the rates accordingly.  

  1. Business vintage

A lot of lenders consider the duration for which the business has been in existence. Many lenders will not offer loans to start-ups or businesses that have just been incorporated. They will offer loans to only those businesses that have been in existence for a while and may require the business to be at least 3 years old to be eligible for a high loan amount. If you do manage to get a loan for the startup, you may have to pay a high-interest rate because of the high-risk factors. 

  1. Business financials

When applying for a loan, the lender will ask you to share copies of the financial statements in order to check the financial status. The financials of your company speak a lot about its ability to generate revenue and your repayment capacity. When you apply for a loan, you must provide financial documents including the PAN Card of the firm, bank statements, income tax return form, GSTIN, income statement, audited balance sheet, and profit and loss account for the last 2 years. You will also have to provide proof of business continuity of 3 years and this could include ITR, sales tax certificate, trade license, or memorandum of association. The lender will see the viability of the business and then decide on the rate of interest. 

  1. Interest rates prevailing in the market 

The lender will determine the interest rate depending on the benchmark market interest rate. The interest rate in the market will rise and fall from time to time and this will have an impact on your business loan rates. You must be aware of the market rate before you apply for a loan. 

  1. Business credit

The credit history of your business will have an impact on the loan approval and interest rates. If you have a strong credit history and have always repaid the previous dues on time, you will be able to enjoy low interest on the loan. 

  1. Personal credit score

In some rare cases, the lender will attach your credit score with the business credit and your interest rate will depend on the same. If you have a high credit score, it will ensure quick loan approval and the interest rate will be low. Your personal repayment history will play a big role in estimating the business loan interest rate. 

Tips to minimize the interest rate

All borrowers are looking to get low interest on their loan and there are effective ways you can minimize the rate of interest. Here’s how.

  • Improve the credit score

The credit score plays a huge role in determining the rate of interest on the loan. Always check the credit score and if it is lower than 725, you need to take some time and focus on ways to improve it. Be regular with the credit card bills and EMI payments, try to diversify the credit mix, and use different credit lines. You must also have a low credit utilization ratio and a low debt-to-income ratio. Take a good look at the credit report before you apply for the loan. If you notice any discrepancies, you need to write to the bureau and get it rectified. 

  1. Compare lenders

No matter the type of loan you are applying for, it is important to take some time and compare the lenders and the market rates. You can get all the information online so compare the interest rates, application procedure, processing fees, other charges, loan amount, and tenure before you make a decision. 

  1. Opt for a short term loan

The sooner you repay the loan, the better it is. You will end up paying lower interest with a short-term loan. If you have a long term loan, the EMIs may be low but you will end up paying high amount in interest. Hence, if you have the ability to make the repayment on time, opt for a short term loan and you will save a lot of interest. 

Since the interest rate plays a crucial role in the business loan, it is not something you should take lightly. Conduct research and look for a lender that offers low interest rate to reduce the monthly outflow and ensure timely repayment of dues. 

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