Every business owner wants to avail a business loan at lowest interest rate. However, the interest rate varies from one lender to another. In addition, all the lenders have fluctuating interest rates, i.e. they offer business loans at different interest rates to different borrowers. The rates can vary anywhere from 10% to 30% or even go beyond that.
The rates depend on how well the business owner meets the eligibility criteria laid by the lender. This is the reason why two business owners get the same loan for business from the same lender at different interest rates. There are a few other factors as well that affect the business loan interest rate. In case you are planning to avail a loan and thinking to get a business loan at lowest interest rate, then it is a must for you to understand these factors.
Let’s take a look at the factors that affect the business loan interest rates.
A CIBIL score or credit score is the indicator of the creditworthiness of the borrower. It signifies how responsible the borrower is with money and can if he can be trusted with money or not. A CIBIL score lies between 300 and 900. If the score lies near 900, it signifies the borrower is responsible and if it is near 300, the borrower is not responsible.
A CIBIL report contains the following information about the borrower:
- Bank statement
- Credit Card information
- Previous loan repayments
- No. of times the borrower has applied for a loan
- No. of times the borrower has defaulted the loan payment/ cheque bounce instances
- Criminal cases against the borrower
Also, a high CIBIL score is an important business loan eligibility. So, a high CIBIL score indicates the borrower’s high creditworthiness and that it is not risky to lend money to him. So, with least risk, the lender lends business loan at low interest rate. On the contrary, if the borrower’s credit score is low, either his loan application would be rejected or he would be offered loan at the high interest rate, keeping the risk involved in mind.
So, it turns important for the borrower to first work towards improving CIBIL score and then applying for a business loan.
The type of business loan you are availing also affects the business loan interest rate. Primarily, a business loan is categorized into two categories – secured business loan and unsecured business loan. A secured business loan is offered with collateral and an unsecured business loan is offered without collateral.
In case the borrower defaults on the loan for business, the lender can sell off the collateral to recover his loses in case of a collateral loan. Thus, less risk is involved in secured business loans on the part of the lenders. On the contrary, since the collateral free loans are offered without collateral, they are riskier. So, they are generally offered at higher interest rate.
However, if you are availing a loan for business without security from an NBFC or an online company, they offer business loan at lowest interest rate. So, you can look forward to avail a loan for business from the new age lenders – NBFCs and online business loan companies.
As discussed in the previous point, the business loan interest rate also depends on the lenders – from who you are availing the loan. Not just the collateral free loans, the banks offer all types of business loans usually at the high interest rate. Whereas the NBFCs and online business loan companies are lenient in this and probably that is why they are slowly becoming the lenders of choice.
In addition, the NBFCs offer online business loans at minimal documentation and basic eligibility criteria.
If the business turnover is high, lending business loan is safer for the lenders and they will offer business loan at lowest interest rate. A high turnover or income signifies affordability and so, the chances of the borrower repaying the loan are also high. This minimizes the risk in lending money and so, the interest rate reduces as a result.
The business loan amount also affects the business loan interest rate. If your business loan requirements involve a high loan amount, it can make repaying the loan more difficult. In simple words, borrowing a large amount means larger EMIs and taking out a huge chunk of cash from business profits every month. In short, larger loan amounts usually come with high business loan interest rates.
A long repayment term also increases the interest rate for the business loan. Availing an offline or online business loan with longer repayment terms make the loan expensive. In addition, the borrower also has to bear the interest costs for a longer term. To reduce this factor, the borrower can ask himself how much loan amount is sufficient for him and the shortest possible time in which he could repay the amount.
Now that you know all the factors that affect the interest rate for a loan for business, you can consider them and avail the best business loan at lowest interest rate. There are many secured and unsecured business loan lenders in India who offer different business loan products that you can choose from and avail for your business.