Acquiring funds for a business typically carries interest costs, which vary based on the financial institution and loan structure. For Indian SME owners, identifying the lowest viable rate can save lakhs over a multi-year repayment period. However, interest pricing reflects a complex interplay of external bank policies and internal company factors. Continue reading to understand the business loan interest rates in India and the key factors affecting the interest rate you will get.
The Interest Rate of a Business Loan
The interest rate is the key cost component of a business loan that every borrower should evaluate carefully. Business loan interest rates in India on secured business/SME loans range from 10% to 30% per annum. Secured loans require collateral and carry lower interest rates. Unsecured micro business loans have higher interest rates of 12% to 42% annually as they involve more risk for the financial institution.
The interest rate offered to a borrower is determined based on factors such as the type of business, loan amount, credit score, income stability, collateral offered, and relationship with financial institution.
Comparing interest rates across multiple financial institutions through online tools can help entrepreneurs get the most competitive interest rates for their required loan amount and tenure. Opting for the lowest viable rate per one's eligibility is key to reducing the repayment burden.
Elements That Impact Interest Rates on Business Loans
Getting loans for your company means paying interest. Rates can be 10% to 20% or more. What makes rates higher or lower for financial institutions? The following are the key considerations that impact business loan interest rates in India:
1. Business Operation Period
Banks view newer startups as riskier to lend to than companies operating for years. A long time in business shows you can survive and pay loans back. Companies that have been in business for 5 years or more get better rates.
2. Business Profitability
Financial institutions look at your company's earnings. Higher profits mean you can more easily pay interest costs. Steady profits over the last 3 years are ideal. Rapid sales growth also helps get lower interest rates.
3. Your Personal Credit History
Even when your business applies for a loan, your credit matters. Good personal credit scores show that you manage money well, and no recent late payments help lower financing costs.
4. Collateral You Can Offer
You can pledge property, equipment, or savings to secure the loan. A willingness to provide collateral shows a commitment to repaying debt. More collateral offered means better interest rates.
Did you know?
Shriram Finance provides business loans at affordable interest rates starting from 15%*p.a.
How Business Loan Interest Rates in India Affect Your Repayments?
Here are the key points on how business loan interest rates in India affect loan repayments:
- EMI Amount: Lower interest rates reduce EMIs and total repayment amounts, making the loan more affordable. On the other hand, higher interest rates increase the EMI and the overall interest payout, adding to the repayment burden.
- Instalments: Increased monthly instalments and overall costs pressure cash flows due to higher rates.
The chosen rate should align with the borrower's financial capacity based on revenue streams.
Balancing interest rates with loan amount, tenure, and liquidity is key for smooth repayments.
Tips to Negotiate the Interest Rates on Your Business Loan
Getting the lowest possible interest rate on your business loan can save significant money, but negotiating with financial institutions requires smart preparation. Here are the 4 critical tips to follow:
- Learn the terms: Don't get flustered by financial terms like amortisation, collateral, credit scoring, etc. Understand key concepts so you can have informed discussions.
- Showcase stability: Prepare details beyond standard financials. Share business plans, future projections, contingency measures, etc., to highlight your thoroughness.
- Build rapport: Leverage any existing relationships with bankers to establish comfort levels. Seek their guidance to strengthen your loan application
- Research and compare: Compile competitive rates and offerings in the market as leverage. Compare banks and NBFCs before selecting financial institutions to approach.
Conclusion
The interest rate significantly contributes to the overall cost of a business loan. Evaluating factors that impact pricing and comparing rates across financial institutions is essential for entrepreneurs to secure the most competitive interest rate. This facilitates smooth repayment and financial planning for your company.
Consider the above points and make an informed decision about financing. If you have an urgent requirement, an instant business loan with quick approval and disbursal can also be explored with certain financial institutions based on eligibility. However, ensure you evaluate the interest rate offered to make the right financing choice for your business.
