One of the biggest roadblocks to making a business successful is financing. Most businesses fail to do the magic due to insufficient capital. Over the past two decades, there has been some improvement in this sector.
New-age lending institutions have made it easier for businesses to obtain a loan for financing different activities. You have to be mindful of the cost of borrowing, i.e., interest rate. Taking a loan is only feasible when the benefits outweigh the costs.
Let’s dive deeper into business loan rates.
Understanding business loan interest rates
Business loans are a great way to obtain funds for a company without losing equity. Like other loans, there is an interest charge applicable. Business loan interest rates can be explained as the cost of borrowing money from a lender.
They are typically expressed as an annual percentage rate (APR), which represents the total cost of borrowing money for one year, including interest and any fees or charges.
business loan interest rate in India can range from 8% to 30%, depending on the type of loan, the lender, and the borrower’s creditworthiness. Checking eligibility for a business loan is essential before applying.
Factors influencing business loan interest rates
Various factors can influence the interest rate on your business loan. Some of the most crucial factors are listed below:
1. Credit score
Your credit score and credit history are essential factors that lenders consider when determining the interest rate on your business loan. Lenders prefer borrowers with a good credit score and a clean credit history as they pose a lower risk of defaulting on the loan.
2. Principal borrowing amount
The loan amount you are seeking can also affect the interest rate. Generally, larger loan amounts may have a lower interest rate than smaller loan amounts as they are considered less risky.
3. Type of loan
Different types of business loans have varied interest rates. Secured loans such as term loans and working capital loans tend to have lower interest rates than unsecured loans such as business credit cards and lines of credit.
4. Business’s existence
How long the company has been in the market is also an important factor that might influence the interest rate. A business that has survived for a long period will get a low-interest rate as compared to one that’s new.
5. Lending institution
Different lending institutions have different terms on a business loan. Some lenders may have flexible terms and low-interest rates as compared to others. Shopping around and comparing offers from different lenders is essential to find the best deal.
6. Repayment term
The repayment term of your loan can also affect the interest rate. Shorter repayment terms tend to have higher interest rates, while longer repayment terms tend to have lower interest rates.
Types of Business Loans in India
Choosing the right type of business loan can be the difference between success and failure. Now that we have a fair idea as to what factors influence business loans, let’s look at the different types of business loans available in India.
1. Term loans
Term loans are secured loans that allow you to borrow a lump sum amount of money and repay it over a fixed period. These loans typically have a lower interest rate than unsecured loans and are ideal for long-term investments.
2. Working capital loans
Working capital loans are short-term loans that help businesses meet their day-to-day operational expenses. These loans typically have a higher interest rate than long-term loans as they are riskier for lenders.
3. Business credit cards
Business credit cards are unsecured loans that allow you to borrow money up to a predetermined credit limit. These loans typically have a high-interest rate and are ideal for short-term financing.
4. Line of credit
A line of credit is a type of revolving credit that allows businesses to borrow money up to a predetermined credit limit. These loans typically have a higher interest rate than term loans but offer more flexibility in terms of repayment.
Choosing the right business loan is a crucial decision that can change the course of a business. It is vital to conduct your due diligence before choosing a loan. It is always a good idea to compare multiple lenders to find the lowest-possible interest rate deal.