Fluctuatingbusiness loan interest rateshave a rippling effect not just on businesses and EMI repayments but also on the economy. But what is the cause of these changes? How have they affected the business owners? In this article, we will discuss the evolution of interest rates and their effects.

Why do interest rates change?

Financial institutions borrow funds from the Reserve Bank of India (RBI) to lend. The rate at which they borrow these funds is called the repo rate. Interest rates are dependent on the repo rate received by a financial institution.

Repo rates and, in turn, loan interest rates are affected by inflation and deflation.  During deflation, the prices of goods and services decrease. RBI reduces the repo rate to boost the economy, making it easy for lending institutions to borrow money. This repo rate reduction leads to lower interest rates. Similarly, when prices rise during inflation, RBI increases the repo rate to discourage borrowing and curb inflation. It results in higher interest rates for business owners.

Thus, business loan interest rates  are affected by the economy and its behaviour.  Whether it is booming or crashing, frequent changes in the economy affect our spending patterns and thus the currency’s strength. The change in interest rates is an attempt to stabilise the financial system.

How does the changing interest rate affect your business?

Changing interest rates affect not only your business loan but your business as well. Irrespective of whether you are a business owner or not, everyone is a consumer. With higher interest rates, end consumers pay higher amounts as EMIs. They have a lesser portion of their income available for expenditure, which lowers sales. The reverse is also true. Lower interest rates offer more funds for spending, and we witness sales growth.

Additional Read: When You Need to Opt for Business Loan

What can I do to safeguard my business from this fluctuation?

There are ways to safeguard your business, such as business financing with fixed interest rates. As a business owner fulfilling the business loan eligibility, you can opt for a fixed interest rate to remain unaffected by the economic changes. However, while it protects you from the increased rates, you cannot take advantage of lowered rates either.

Short-term loans are relatively unaffected by changes in interest rates, as opposed to long term loans with larger sums. So before you apply for business financing, conduct extensive research to find out what would be the best for your business.

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