Business loans are specifically designed to be used as a means of funding for a variety of business needs. It is a one-stop solution for a variety of company needs. However, businesses are still uninformed of the several factors that determine the business loan interest rate. If you are one of them, read this article to learn everything there is to know about small business loan rates.
7 Factors that Influences your Business Loan Interest Rate
Nature of loan:
Business loans can be tailored to meet your specific needs. There are various types of loans accessible to fit your various business requirements. The majority of these loans are unsecured. But there are also a few that are secured. For example, term loans that are available for a maximum duration of 36 months are unsecured. The interest applicable for term loans are also a bit high.
However, the applicable interest rate will be substantially lower if you finance the machinery purchase with equipment finance. This is because, under a machinery/equipment loan, the equipment is hypothecated with the lender until all outstanding debts are paid off.
Nature of your business:
Different types of businesses entail different degrees of risk. If you run an import-export business, the rules and regulations of the country from which you import/export your goods are extremely important to your success. Similarly, there are firms where the key risk considerations are political pressure, geographical barriers, and climatic conditions. The lender takes all of these criteria into account when performing risk profiling. They determine the business loan interest rate on the nature of your business.
Business Vintage:
The number of years your company has been in operation also influences business loan interest rates. Do you know why financial institutions are cautious lending to start-ups? The reason for this is a lack of experience and uncertainty about how they would manage with the ever-changing business environment. Businesses having more than three years of experience in the market indicate their financial soundness. It is also easier for the lender to evaluate the credibility of the vintage company. As such, the more experience you have in business, the more likely you are to get approved for a low-interest small business loan.
Business financials
Business financials are one of those factors that determine not just the interest rate on a business loan but also the loan approval. Your loan application is considered incomplete until you provide the lender with copies of your company’s financials. Some of the common documents that determine your business loan interest rate are listed below.
- Copy of company’s PAN card
- GST number and GST return certificate
- Bank account statement of recent months
- Income Tax Return (ITR) of the recent years
- Audited balance sheet and your company’s profit and loss statement
- Business continuity proof
The business records assist the lender in analysing the profitability of your company. It allows them to see how your company’s sales graph has changed over time. The lender will reject your application if any of the above documents are missing.
Market ConditionsÂ
Market conditions have an impact on all types of lending, not only small business loans. Interest rates fluctuate for a variety of causes, including the RBI’s base rate, monetary policy, inflation, and so on.
The interest rate may also fluctuate owing to war, natural disasters, or any unrest in a friendly country. The conditions that fall under this category are uncontrollable.
Business Credit History
Credit history, like other factors, plays a role in deciding the interest rate on a small business loan. The lender considers the number of loans you have taken in the past to satisfy your business demands, your repayment history, and your debt-to-revenue ratio. If the lender finds any of the previous components to be unsatisfactory, they will reject your application.
Personal Credit History
Your personal credit history is always a vital factor, regardless of the kind of loan you are applying for. Assume you have a strong business profile and your company has been profitable since its inception, but you have defaulted on multiple previous loans on a personal level. Do you believe the lender will approve your application in this situation? Absolutely not.
Therefore, before you apply for a small business loan, first go through your personal credit history.
How to Get a Small Business Loan at a Low-Interest Rate?
To secure an affordable business loan interest rate, keep the following pointers in mind.
- Attempt to improve your credit history in any way that you can.
- Keep an eye out for special deals from various financial institutions. Before settling on the best lender, conduct sufficient research.
- Try to obtain a small business loan with a shorter term if your budget allows.
- Maintain the lowest possible debt-to-income ratio.
To Conclude:
You cannot secure a low-interest loan if you are overlooking the factors listed above. The above elements are extremely important in assessing your loan eligibility, as well as your business loan interest rate.