Taking a Business Loan is quite normal for small & medium-sized firms, who invariably need additional funds to branch out, scale operations and increase workforces. The Indian government proactively supports the MSME sector with kickbacks and legislative relaxations. Today, availing a Business Loan is neither tedious nor difficult. A huge part of this can be attributed to NBFCs who provide Business Loans quickly to enterprises in need. However, many SME owners who need to avail credit for growth still remain apprehensive about some aspects of taking loans, particularly the Business Loan interest rate they’ll need to pay over a period of time. If you own a small or medium business and need some funds for furthering your horizons, read on. Of course interest rates are the most important aspect of taking loans, and it is crucial to not only check but understand the interest rates and how they work: before applying.
The interest rates for unsecured Business Loans are a little higher than other loan types (especially if they are collateral free loans) and the repayment tenures are understandably longer. An exhaustive and thorough need-based analysis will help any borrower identify the financial institution offering the best business loan to them.
Here’s a quick guide to checking interest rates and how to apply for a Business Loan online.
What are Business Loan Interest Rates?
An interest rate is a percentage of loan a borrower pays to the loan provider in addition to the borrowed amount. Most financial institutions charge interest with each scheduled EMI repayment. The EMI consists of two parts: a repayment on the principal balance and the applicable interest. The interest component gets lower as the loan balance decreases. The amount a borrower pays to repay the loan in a year depends on the APR (Annual Percentage Rate). It is the interest on the total loan amount the borrower pays annually. While checking the Business Loan interest rate, any aspiring borrower should aim at getting the minimum APR to get a loan with the lowest interest cost.
Types of Interest Rates
Usually, Business Loans are offered with these interest rates:
- Fixed Interest Rate: As the name suggests, a fixed interest rate remains fixed for the entire loan term. Its primary benefit is that it enables borrowers to plan their finances without worrying about market fluctuations.
- Floating Interest Rate: In a Business Loan with a floating interest rate, the loan term remains the same, but the interest rates may change anytime. The changes in the interest rate depend on various factors, and the government’s policy rate governs it. As the interest rate changes, the EMIs also increase or decrease invariably. One advantage of a floating interest rate is that it is often more economical than the fixed rate, saving a substantial amount of money when it goes low.
While comparing Business Loan rates, enquire about the type of interest rate the lending institution or the NBFC offers.
Importance of Interest Rates While Taking a Loan
The availability of multiple loan options often leaves borrowers confused, and SME owners are no different. Whether an SME needs funds to build working capital, purchase inventory or equipment, invest in marketing, or any other purpose, the interest rate is the most significant factor when choosing a loan. Even a reduction of 0.5% translates into substantial savings on the EMIs throughout the loan tenure. So, while the loan tenure and amount are also significant, loan seekers must pay special attention to interest rates from different Business Loan options.
Factors Affecting Business Loan Interest Rates
Every aspiring borrower wants a Business Loan at the lowest possible interest rate. So, understanding the internal and external factors that help decide the loan interest rate is essential. Here are the most important ones.
- Business Nature: The kind of industry a business is involved in is a primary factor determining the Business Loan interest rate that will be offered. Lending institutions examine an applicant company’s financial track records and see if it is a loss or profit-making operation. Of course: the business should be legal and operational in a place that is not blacklisted.
- Credit Score: This number reflects a borrower’s capacity to repay the loan on time. A CIBIL score of 700 and above or/and a CMR score of 6 (at least) are good enough to get a Business Loans at a reasonable interest rate.
- Business Vintage: The number of years the business has been in business matters significantly because lending money to well-established enterprises is safer for lending institutions. If the SME owner has successfully run the business for several years, lending institutions may charge them a lower interest rate.
- Annual Turnover: Businesses with a high annual turnover get lower interest rates than those with a low turnover.
- Revenue and Profit: Lending institutions check a company’s annual, quarterly, and monthly revenue before determining the interest rate.Businesses with a satisfactory record of revenue and profit get lower interest rates.
Things to Consider while Researching Business Loans
Most importantly, aspiring borrowers must ensure they fulfil the lending institution’s eligibility criteria and have a good credit score. They should go through several Bank and NBFC websites, and check their offers and interest rates. However, the interest rate is not the only parameter that constitutes the best loan offer. Flexibility in repayment is something borrowers shouldn’t overlook. Also, pay attention to their additional charges, repayment terms, customer service, loan procedure, and approval speed. Read the fine print carefully and apply only when you are aware of the terms & conditions of the loan.
Applying for and getting Business Loans has never been easier as new age NBFCs like Clix Capital have digitised loan applications for the convenience of their partners, while also offering collateral-free Business Loans at the most competitive interest rates with minimal documentation for aiding the immense growth story of MSMEs in India.
Tips to Get the Lowest Interest on Business Loans
Remember these points while looking for the lowest Business Loan interest rate:
- Improve the credit score to reach a minimum of 700.
- Maintain a consistent repayment history.
- Retain a stable income source that works.
- Opt for a shorter loan term to save on the interest cost.
- Do not close old accounts to retain their credit limit and length.
Steps to Apply for a Business Loan Online
Once an aspiring borrower finalises a Business Loan with the lowest interest rate, these are the steps to apply for an online Business Loan.
- Go to the lending institution’s website using your smartphone or laptop.
- Select Unsecured Business Loan on the home page.
- Click ‘Apply Now’ and enter your phone number.
- Submit the details along with the OTP received.
- You’ll get a call from the lending institution’s representative for in-person verification.
- Once verified, you’ll get the loan offer with complete details.
- Accept the offer and get the loan amount disbursed to your account instantly.
Deciding on a loan offer is quite an experience, especially for first-time borrowers. Please assess your financial needs so you don’t borrow more than you need. And evaluate your credit profile to ensure you fulfil the eligibility criteria of the lending institution to get the most suitable loan offer.
