How Are Interest Rates Determined on Business Loans?

Business loan interest rates vary significantly, on the basis of the type of loan, the lender concerned, and the borrower in question. It’s needless to say, the economic scenario plays a key part, which is reflected in the fact that it is harder and more expensive to get a business loan in times of general economic downturn.

Surely, competition too has a considerable effect, but rates won’t be half cheaper in the other bank anyway. Generally speaking, the principal factors affecting business loan interest rate can be classified in two broad categories: business-related factors, and factors related to the business owner, lender and loan. NBFCs offer MSME and SME loans for business growth and expansion. It not only promises a high loan value of up to Rs. 30 lakh with low interest rate, it also assures borrowers of providing the best financial solutions for small and medium businesses. These loans can be availed in 24 hours by submitting only 2 documents.

The business loan interest rate is generally affected by the following three factors which are related to the business borrowing the funds:

Capacity:

Capacity refers to how much money a business can borrow, which is also an indicator of how much they can pay back and how fast. Lenders calculate this by comparing usual monthly liabilities and usual monthly revenue. Another factor which also has a bearing is the period of time over which the business has been operating and the period through which it has been making a profit. Many lenders require businesses to furnish accounting evidence of two or three consecutive profitable years to offer a business loan.

Type of business:

Some types of businesses are considered to be more secure than others, by lenders. For example, an online startup will be considered riskier than other types of businesses, and thus, be forced to pay higher interest rates on business loans.

Collateral:

Almost every business loan requires collateral. This collateral can be company assets or personal assets of the owner. Company assets can be company-owned machinery, equipment, real estate, accounts receivable, inventory, etc. The more collateral is presented, the lower the interest rate. However, it should be noted that a discount rate will be applied to the value of these assets in order to calculate the borrowing base.

How bank specifics, loan specifics and business owner specifics affect business loan rates:

Type of lending institution:

Different types of lenders usually offer different interest rates on business loans. For example, it is usually cheaper for foreign banks. Also, specialist banks may offer cheaper rates than large retail banks. Also, brokers, who are not lenders, but can find the right ones, will hunt down cheaper rates for their clients.

Loan specifics:

Different loans are accompanied by different interest rates. The larger the loan size, the cheaper the interest rate, since businesses will have more time to make repayments. Besides, note that secured business loans promise cheaper rates than unsecured business loans.

Business owner specifics:

Since a director’s guarantee is often required for collateral free business loan, the personal credit history of the business owner or director will also be scrutinized and thereby, have an effect on business loan interest rates.

The bottom-line is, banks are always targeting to maximize profits for their shareholders. On the flip side, consumers and businesses seek the lowest rate possible. From a customer’s perspective, it always pays off to have the highest credit score possible, put up collateral or a large down payment for a loan, and using many services from the same bank to get a discount.

Published by Nishitha

I am done with my Physiotherapy Graduation. And I always try to share Health and technology tips with people. Apart from Physiotherapy and being a tech savvy, I do explore more on Technology side and I keep sharing my findings with wider audience.

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