The business loan interest rate is affected by various internal and external factors. Different lenders offer business loans at different rates. Also, many lenders offer business loans at different rates depending on the applicant’s eligibility. As a borrower, you must understand various external and internal factors that affect business loan interest rate to make sure you do your best to reduce the overall cost.
The external and internal factors affecting business loan interest rates are:
- Type of Loan: There are two types of business loan provided by both banks and NBFCs secured business loan and unsecured business loan. As a borrower, you have to pledge any asset of yours as collateral to avail the secured loan, while in case of unsecured loan, you can avail the loan without any collateral. Since the degree of risk involved in both these loan types varies for a lender, the interest rate charged on them also varies. The rate of interest is comparatively lower in case of the secured loan than the rate of interest for an unsecured loan.
- Business Type: At the time assessing a loan application lenders assess your business types as well and the risk involved in it. Lenders consider some businesses to be too risky and avoid giving loans to them. Even for businesses to which they provide loans, the degree of risk associated with each is different and based on that the interest rate of the loan advanced can vary too.
- Credit Score: Even in the case of business loans, lenders consider the credit score and credit history of business owners to be an important criterion. Based on your credit score lenders analyze the risk involved. Lower rate of interest is offered if the credit score is high. However, a higher interest rate is charged in case the credit score is low.
- Experience: Business loan can be availed for both starting the business and also for growth. Lenders charge higher interest rates from start-ups as there is a higher risk involved. On the other hand, a lower rate of interest is charged from existing businesses who are looking for business loans for further expansion.
- Inflation: Increases in inflation results in an increase in the prices of products and services. This, in turn, increases the interest rate of business loan as well, as the purchasing power of money reduces. As a borrower, you must also consider inflation to pick the best time of availing the loan.
- Annual Turnover: Lenders consider the annual business turnover to determine the eligibility for a loan amount and the interest rate to be charged. A high turnover shows the better ability of the business to repay the loan as compared to a business with low revenue. You might also get flexible repayment options available if your annual turnover is high enough.
- Monetary Policy: The RBI announces monetary policy each quarter and sometimes on a bi-monthly basis. Through its monetary policy RBI attempts to maintain liquidity and regulate information in the economy. When RBI relaxes monetary policy to increase liquidity, the interest rate of loans reduce and make the business loan cheaper and vice versa.
- Credits Demand and Supply: The interest rate of business loan is also affected by the demand and supply of credit. When the demand for credit is high, the banks increase interest rates as well. Similarly, the rate of interest is reduced by banks when the supply of credit exceeds the demand. You can easily reduce your credit cost by applying for the loan at a time when the demand for credit is low, or supply is high.
Make you sure to analyze these factors before submitting your business loan application.
Summary
Both external and internal factors have their effect on the business loan interest rate. As a borrower, you must know these factors so that you can apply at a time when it is most beneficial to you.
- When the demand for credit is higher, the interest rates tend to shoot up and vice versa. Thus, apply at a time when the demand for credit is low, or supply is high.
- Different businesses have different degrees of risk involved. Lenders assess the risk associated with a business, and this risk factor contributes to determining the business loan interest rate.
- A business loan is both secured and unsecured type. The interest rate for a secured business loan is lower as compared to the interest rate for an unsecured business loan.
- When inflation increases the purchasing power of the money reduces, which increases business loan interest rates.
- RBI announces monetary policy at regular intervals to maintain liquidity and control inflation. When RBI relaxes monetary policy to increase liquidity interest rate reduces. Applying for a business loan at that time will fetch you a lower rate on the business loan.
- Banks and NBFCs advance to both existing and new businesses. However, the risk involved with advancing to start-ups is greater, and hence lenders charge higher interest from them.