Funds are an intrinsic necessity for any business enterprise, big or small. Small enterprises are more discerning about the cost of the business loan because of their compulsion to make the best use of the borrowed funds.
One factor that becomes primarily important is the business loan interest rate. The other factors are various fees applied to the loan. For an applicant for a small business loan, the cost being important, the ideal scenario is to check up the business loan EMI calculator to arrive at the prospective financial implication over the entire tenure of the loan.
What makes business loans so important?
Business needs capital to establish, run, and grow. Depending on the size and nature of the business, fund requirements vary. To meet up the fund requirement, a business loan is the only option to help it grow and achieve its potential. It is for this simple reason that business loans occupy a major share of the portfolio of lenders which includes banks, NBFCs, and Fintech companies.
Let us check out what makes business loans imperative:
- Short duration loans.
- Ownership is protected.
- Through amortisation, you are aware of the entire movement of the loan.
- Customised loan products fully aligned with emerging
Be that as it may, the rate of interest and other fees are needed to be factored in to weigh the cost of capital and it impacts on the business.
Business Loan Interest Rate Regime:
The two types of rates of interest applied to loans in India are Floating and Fixed Rates. These rates are further patterned on MCLR (Marginal Cost of Fund Lending Rate) depending on the Repo Rates formulated by the RBI from time to time, all banks come under the purview of this regime from 1st of April 2016, as mandated by the RBI. The spread over this rate is defined by each bank on its product range. In the case of NBFC, they set their own benchmark called PLR (Prime Lending Rate). They usually impose the rate at a discount over the PLR depending on several factors, which we need to understand.
Impacting Factors of Business Loan Interest Rate:
The rate of interest applied to the business loan becomes a decider for many applicants, and they design their loan requirement on it. The simple way to get a feel of the implications is the use of Business Loan EMI Calculator.
It makes sense to learn about the various factors that are considered for the imposition of interest rate so that you can also work on them for your benefit. The factors are two – Internal and External. Let us see what they mean concerning the business loan.
- Internal Factors:
- Creditworthiness
- Financials and Fundamentals
- Vintage
- Collateral
- Business Type
- Prospects
- External:
- Monetary Policies of RBI
- Inflation
- Status of Economy
How do the factors influence the rate of interest?
While you do not have any control over the external factors, you can work on the internal factors to soften your load. Let us check out how:
- Creditworthiness: Often a deciding factor in banks, rating from a credible agency is given great credence. The commonest is the CIBIL score. Fintechs have an additional means of ascertaining the creditworthiness of the borrower by relying on data analytics in addition to the CIBIL score, which is not the only benchmark for them. For a good score, the rate can be lower.
- Fundamentals and Financials: A favoured potential borrower is one whose business fundamentals are strong. Consistent booking of handsome profits is a sign of the repayment capacity of the borrower without the loan getting sticky.
- Vintage: Most lenders are comfortable with borrowers with a good track record in business. In juxtaposition with startups, the scenario may be different with additional interest being imposed.
- Collateral: Banks usually call for collateral as security. Depending on the quality and quantum of security, the rate of interest may be varied. In comparison, Fintechs are reputed to extend collateral-free unsecured small business loans. It calls for a higher rate of interest.
- Business Type: All businesses are not the same, and their characteristics and nature differ, and so also the type of business loan sought. Depending on the business activity, each business carries an attached risk factor. This is considered for the rate of interest.
- Prospects: It is substantially determined by a robust business plan and the movements in the industry which determine the prospects. A business with a finite growth graph will certainly attract a lower rate of interest.
Eligibility Criteria for Business Loan:
Since the business loan interest rate is related to the factors already discussed, it is also prudent to check out the eligibility criteria. These parameters are also important for determining the rate of interest because many of the factors impacting the rate hold relevance here.
- The ownership of the business must be Proprietor, Partnership, Private or Limited Liability Company.
- The vintage already discussed as a factor are specified by the lender, which starts from a minimum of six months without a break.
- The minimum quarterly turnover need is Rs.90K preceding the application date.
- The business activity and the location of the enterprise should not match with the negative list, and there should be no illegality involved.
- Furthermore, Charitable Institutions, Trust and NGO are not eligible for business loans.
Fees and Charges:
As important as the rate of interest is the other factors that impact the cost of capital. Even tenure is important for the rate of interest. Let us check them.
| Rate of Interest | 15% to 27% depending on the factors discussed |
| Tenure | Up to 36 months. Long Term Loans have lower interest |
| Processing Fee | 1% to 2% of the loan amount recovered on disbursal |
| Foreclosure Fee | There is no foreclosure charge. |
| Repayment | EMI or Fortnightly |
Bottom Line:
Lenders are eager to grant business loans to viable enterprises that look promising. On the other hand, no business can survive without an infusion of funds for reasons as varied as expansion, upgrade, working capital, marketing and publicity, to name a few. While there are customised loans for each of the need, sound business planning can help you to attract softer terms, including the rate of interest. All you need is meticulous handling of the factors impacting the rate of interest.