If you are a small and medium business owner, you would know what a chore it can be to secure a business loan. Apart from the general problem of securing business finance, SME owners also face exploitative interest rates, unfeasible loan repayment schedules, and high prepayment penalties. This in turn reduces their trust in institutional finance. However, in recent times, the business lending scene has seen a transformation owing to FinTech. It is a relatively new form of business finance which focuses on speed, efficiency, and ease of getting business loans. FinTech finance is offered by non-banking financial companies like Lendingkart and remains one of the fastest ways to get a business loan today.
But as things stand, most borrowers are still worried more by the interest rates on business loans rather than the associated problems in securing them from a traditional lender. While NBFCs like Lendingkart do offer lower interest rates on business loans, there is an internal and external component to determining interest rates which cannot be overlooked by any marketplace lender. In this post, we will have a look at the top factors that have an effect on your business loans interest rate and how you can tweak some them to lower the amount of interest you pay.
Internal factors that increase or decrease your business loan interest rates:
- Credit Score: The credit rating of your business is of utmost importance when it comes to determining business loan interest rates. If your credit rating is below the 700 mark, there is a high chance that your loan application will get rejected or you will be charged an exorbitant amount of interest. Improving your credit score by repaying existing debts and streamlining your cash flow will help you lower the interest rates on future loans in this case.
- Time in Business: The age of your business also matters when it comes to determining your loan interest rates. If you have a long-running enterprise, the lenders trust you in terms of stability and performance and are willing to take the risk of lending money on lower interest rates. That is one of the reasons why startups and new businesses without a minimum experience struggle to get institutional finance in India. However, NBFCs like Lendingkart have a very liberal ‘getting on your feet’ requirement and are willing to lend to stable business ventures as young as 6 months.
- Type of Business: Several industries and businesses are considered untouchable by financial lenders. These businesses are usually classified by government and financial policies as highly volatile and risky. Getting a business loan for such a venture often includes special permissions, higher interest rates and fulfilling specific conditions.
- Business Plan: A lender will often ask you to disclose your plan for growth before providing finance. So, in case you have a ‘make it as you go’ policy or the lender is not overly confident in your ability to execute a plan, you may still secure financing albeit at a higher rate of interest. On the other hand, preparing a healthy and feasible business plan before applying for a business loan can actually lower your interest rates.
- Revenue / Sales: Another major point on the checklist for getting a business loan with lower interest rate is having a healthy revenue stream, which in turn means having a good sales network. In case, your business is not earning in proportion to the amount of loan you are seeking, the application may get rejected or you are offered a modified loan amount or the interest rates are raised according to the risk of default. Again, this is an internal factor and you can take steps to get lower interest rate on a loan by optimizing your operations and income.
External factors that increase or decrease your business loan interest rates:
- Rate of Inflation: It is the rate at which the value of a currency reduces, which in turn has an effect of the general prices of goods and services. If the inflation rate is high, then things become costlier and the purchasing power of a consumer decreases. It has a domino effect on the rate of interest on business loans. A decrease in purchasing power means the interest rates on borrowings go up. So, it is important to take note of the prevailing economic conditions when applying for a business loan.
- Monetary Policy of RBI: The Reserve Bank of India uses the monetary policy to keep a check on the liquidity in the market. When the monetary policy is relaxed, the liquidity increases and there is more cash in the market and so the interest rates on loans go down. On the other hand, when the RBI tightens the monetary policy to check oversupply in the market, interest rates on business loans increase.
- Loan Demand and Supply: As with every commodity, the concept of demand and supply also applies to the loan products. When the demand for business loans in the market goes up, so does the interest rates and vice versa. So, if you are planning to apply for a business loan, do a check on loan demand and supply for your sector to get the best interest rates possible.
- Type of Loan: Interest rates on a business loan also depends on the type of loan you apply for. If you are getting a secured loan i.e. a loan that requires an asset as collateral, the interest rate is going to be lower as the lender already holds something of value to recover the money. On the other hand, if you apply for an unsecured business loan, the interest rate is going to be slightly higher. But you can also get an unsecured business loan with lower interest rates if you have optimized the internal factors that have an effect on your loan interest rates.
So, that’s that. Interest rates are one of the most important aspect of getting a business loan as lower interest rates help you in growth and higher interest rates may lead to a vicious debt cycle. Therefore, we advise that you analyze all internal and external factors that affect your business loan interest rates before applying for one. To know more about FinTech business loans, visit us at https://www.lendingkart.com/