Whether you need funds to get your new venture off the ground or manage your business’s routine operational expenses, a business loan can help you out. Since interest rates on loans significantly impact EMIs and, ultimately, your overall repayment costs, here’s all you need to know about the business rate of interest.
How is the interest rate on business finance calculated?
The loan you avail of for your small business comes at a cost. This cost is the loan rate amount your preferred lender charges on the borrowed sum for a fixed term. The rate of interest is usually expressed in a percentage of the principal amount.
Here, the lender calculates the nominal loan interest by multiplying your outstanding loan amount per day by the interest rate assigned, considering multiple factors that affect the small business loan rates.
However, the business rate of interest doesn’t include the prepayment fee, penalty, foreclosure charge, processing fee, and other applicable charges levied on the loan by your lender.
Additional Read: 10 Questions to Ask Yourself When Applying for a Small Business Loan
Some factors influencing loan interest rates
#1 Your business type
If your business undergoes frequent changes in legislation, has inconsistent revenue, and doesn’t have a solid business model in place, chances are, you are a high-risk borrower. Before assigning you an interest rate, the lender will check your business’s annual, quarterly, and monthly revenue. You can qualify for more competitive small business loan interest rates with profitable trends and positive business financials.
#2 Age of the business
From a lender’s perspective, a stable business is one that has been around for a few years and has a proven track record of handling credit for years without defaulting. With solid business experience, you can easily get a loan for further expanding your venture.
#3 Annual turnover
High or decent but consistent turnover for your business translates into a high repayment capability. After all, greater profits and stability mean you’ll have the funds for making timely EMI payments. Hence, you may get a lower rate on your loan amount.
#4 CIBIL score
Assuring your lender of timely payments can reduce the interest rate applicable. An excellent way of landing better interest rates is by having a healthy CIBIL or credit score, ideally over 700, which depicts high creditworthiness.
The lender meticulously reviews your credit profile which represents your previous debt obligations and loan repayment history, to understand your repayment capability and financial habits. With a high score, you can bag more attractive business loan interest rates.
Additional Read: Small Business Loan vs Business Credit Card – Which One is Better?
Over to you
Since lenders consider your current and projected finances while reviewing your loan application, you must have relevant documents showing cash flow and profitability ready. Additionally, draft a solid business plan detailing how you plan to use your loan proceeds. You’ll also be required to meet the eligibility conditions of the lender to qualify for a loan.
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