21 October, 2024 | 11:01 IST
A business loan provides financial support to help businesses manage cash flow, accelerate growth, and invest in new opportunities. Getting a business loan has become convenient with the advent of a complete digital process. You can apply for a loan and get approval within a few minutes using your mobile phone.
With a wide range of banks and non-banking financial companies (NBFCs) offering various types of business loans, it could be a problem for borrowers to choose a business loan with the best interest rate.
Here are key factors you should keep in mind while selecting the best business loan offer.
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The interest rate charged on business loans can start at as low as 10% per annum in India. However, the exact interest rates may vary depending on factors like the lender you choose, your credit score and the nature of your business.
A higher credit score can enable you to get a lower interest rate and favourable terms for your borrowing. In contrast, a lower credit score could result in a higher interest rate or your loan application getting rejected. You can compare the different business loan options on the Moneycontrol app and website to get the best interest rates.
Lenders analyse the creditworthiness of entrepreneurs to repay the loan by considering their credit score and business turnover.
Here’s an overview of the key conditions businesses must fulfil to qualify for a business loan:
Here’s a look at the documents you will need when applying for a business loan:
Several factors related to your business's performance, as well as external conditions, can impact your business loan interest rate. While business owners typically cannot control external factors like high inflation, they can manage business-related aspects such as credit score, loan tenure, and financial health to secure the lowest possible interest rate.
Getting a business loan has become hassle-free with the advent of digital platforms like Moneycontrol, which offer a 100% paperless process.
Here’s a look at some key factors which can potentially impact your business loan interest rate:
High credit score
Private sector and public sector lenders, both use the credit score assigned by credit bureaus to evaluate your creditworthiness.
Having a good credit score not only increases the chances of your loan application being approved it may also lead to banks offering you a loan at a lower interest rate. It is advisable to settle all possible debts to have a healthy credit score while applying for a new business loan. You can check your credit score on digital platforms like Moneycontrol for free.
Collateral against loan
Having an asset to offer as collateral against a loan makes your borrowing a secured loan. Secured loans are offered at lower interest rates compared to other types of borrowings. Assets of a business such as machinery, stock and office premises can be offered as collateral while availing of a business loan.
Choosing the right type of loan
The interest rate charged on the loan can be charged in two ways, fixed interest rate or floating interest rate. Borrowers, who opt for a fixed-interest rate loan, pay a fixed amount as the Equated Monthly Instalment (EMI) stays constant. On the other hand, the floating interest rate changes based on policy changes. Revisions in the repo rate lead to changes in the interest rates. Generally, banks offer fixed-rate business loans at a higher interest rate.
Nature of business
The nature of a business also influences the interest rate charged on the business loan. Banks often consider seasonal and speculative businesses as risky and offer loans at a higher interest rate than others. Having a business with a stable demand trend all around the year enables you to secure a lower interest rate for your loans.
Strong financials
For a business loan, banks and NBFCs typically analyse the financials of your business and check documents such as the balance sheet (assets and liabilities), profit and loss account, margins and cash flow statements.
Businesses which are profitable and generate healthy cash flows are likely to get a business loan at a more lucrative interest rate.
Additionally, having low leverage– low existing debt –can also lower the interest rate offered as such a business can handle more debt.
Future business plan
Some banks ask borrowers to share a business plan along with the loan application. It is advised that borrowers should include details such as the purpose of the loan, the revenue of the business and its margin targets. If the lender finds your business planning effective, they may offer favourable terms for the borrowing.
Good relationship with the lender
If a business owner has an existing relationship with a lender in the form of current accounts, deposits, or loans, the lender may offer a business loan at a lower interest rate than other borrowers.
Business owners should compare the interest rates and loan features of various banks and NBFCs. By doing comparison and research choose the right business loan for their needs and at the lowest possible interest rate.
Getting the business loan deal involves comparing different options that suit your requirements. The Moneycontrol app provides a user-friendly platform to apply for business loans with affordable processing fees and transparent terms.
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