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Factors Affecting Business Loan Interest Rate

Mar 4th 2020 at 11:43 PM

The growing popularity of business loan has helped borrowers solve their issues of arranging for funds required for running the business. Availing a business loan is easy and convenient and can be applied for at anytime of the day. If the business loan is supported by the collateral it becomes easier with for the lender to lend to the borrower.

Various lenders offer business loans at varied interest rates. Before applying for the business loan one should compare the interest rates, processing fees and other charges with the available lenders in the market. Let us discuss the factors affecting business loan interest rates.

Eligibility Criteria to avail business loan –

Applicants in need of business loan must fulfill the eligibility criteria as laid down by the lender in order to avail business loan.

An applicant business loan should be falling under the below mentioned criteria:

  • Must be of age between 21-65 years of age.

  • Must be a self-employed professional having a business stability of 1 year or a self-employed businessman having 2 years of business stability.

  • Must be having a CIBIL score of 750 and above.

  • Must be a self-employed non-professional in the business of manufacturing, trading, and services, sole proprietorship firms, private limited companies./ Must be a self-employed professional of CA, CS, Doctors, Architects.

  • Loan amount applied for must be between Rs 1 lakh to Rs 1 crore.

Now let us have a look at the type of Business Loan Interest Rate :

Smooth running of business requires funds at regular intervals. Requirement may be big or small and accordingly an applicant avails loan to cater to his business needs. Business loans are available at interest rates which can be of two types—Flat rate of interest and Reducing rate of interest

Reducing rate of interest – It is calculated each month on the remaining loan amount. In such interest rate, the EMI comprises interest rate which is payable for outstanding amount of loan for each month with the principal of repayment. After each monthly installment, the loan amount gets reduced. Therefore, the interest calculation for the following month is done on the outstanding amount of loan.

For example. If a borrower has taken a loan amount of Rs 1,00,000 with reducing interest method at 10% p.a for about tenure of 5 years, then the EMI amount would decrease with every month’s repayment. For first year, the borrower will have to pay Rs 10,000 as interest; this gets reduced to Rs 8,000 in the second year, on the reduced principal amount of Rs 80,000 and so on till final year, where the borrower will have to pay Rs 2,000 as interest.

Flat rate of interest – These kind of interest rate is calculated on the full loan amount during its tenure.

For example : A loan amount is availed by an applicant of Rs 1,00,000 at a flat rate of interest at 10% p.a for a tenure of 5 years. He will have to pay Rs 20,000 which is the principal repayment for the amount of (1,00,000/5) + Rs 10,000—interest at 10% of this 1,00,000 is equal to a total of Rs 30,000 per year. Over the tenure of the loan, the borrower will end up paying Rs 1,50,000 that is (2,500*12*5).

What are the factors affecting business loan interest rate?

1. Collateral – Higher the value of the pledged collateral, the more can be the benefits. Pledging the collateral ensures that the loan application will be less risky. High value security like machinery, real estate, home equity, deposits, etc. provides security to the bank in granting the loan amount. Availing a business loan by providing collateral has benefits of getting a concession on the business loan interest rates. Collateral is a security against which the applicant avails the loan.

2. Credit Score - An applicant can get the business loan at better interest rates with additional features if the credit score is a healthy one i.e above 750. A credit score determines the creditworthiness of the applicant. Timely payment of debts will make your credit score a healthy one and a good credit score will create a positive impact in the eyes of the lender.

3. Business Existence – The longer tenure of business establishes; it is not a risk profile and create a sense of belief in the eyes of the lender. A business should have an existence of minimum of 1 years. The higher the number of years a business is operational, higher is the possibility of availing a business loan at lower interest rates.

4. Nature of business – Businesses are classified into priority sector and non-priority sector. Nature of the business determines how secure the business is. Businesses falling under the non-priority sector are granted at higher rate of interest than the priority sector.

5. Business Turnover - The lender can determine the repaying capacity of the debt of loan, by the turnover of the business. The monthly turnover decides if your business is making a profit or running in loss.

The traditional method of availing  a business loan are no longer the norm as online availability of loans have made the whole process more convenient. Applicants can compare the rates of different lenders online and evaluate on the basis of their repaying capacity, which are the potential lenders for their business. The integration of technology into the financial sphere has resulted into a more easier and quicker availability of loan to borrowers also at affordable interest rates.

Kotak Mahindra Business Loan – Applicant looking for funds to meet the necessities in running a business can avail business loan from Kotak Mahindra Bank:

Features of Kotak Mahindra Business Loan:

  • It offers unsecured business loan to the applicants where there is no need to pledge any collateral as security or provide with a guarantor.

  • It offers loan ranging from Rs 3 lakh to Rs 75 lakh for small, medium and large businesses.

  • The loans are offered with a flexible repayment tenure of up to 48 months.

  • The loans are approved in a short span of time on meeting the eligibility criteria.

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