In recent years, India has witnessed significant growth in the number of small and medium scale enterprises. This is because a large number of entrepreneurs are coming forward with innovative ideas to establish their own business. However, establishing a business could require a large amount of capital. While initiating a startup, you will not only have to take care of the initial expenses but also require sufficient funds to ensure the smooth functioning of your business. It is to be noted that raising funds for a new venture can be a difficult process. Therefore, to meet your financial requirements, you can consider availing a business loan. If you already have an established business, you can avail a business loan for your business expansion. A large number of entrepreneurs across the country rely on business loans for the growth and expansion of their business. This has increased the popularity of business loans significantly in recent years.
As a result of growing competition between various banks and NBFCs (Non-banking Financial Companies), small business loans are available at highly competitive interest rates. However, it is advisable to compare various loan offers provided by different lenders before making the final choice. This will help you to avail a business loan that best suits your needs. One major factor that should be considered while opting for a business loan is the business loan interest rate. For greater benefits, make sure that your business loan has the lowest possible rate of interest. Lower the interest rate, lower will be the repayment burden in the long run. There are certain factors that determine business loan interest rates. Some of them are mentioned below:
Experience in Business
The interest rate of your business loan depends largely upon your business experience. The possibility of getting a business loan at lower interest rates increases if you have several years of business experience to your credit.
Your business plans
If you are looking forward to starting a new venture, make sure that you have a detailed and comprehensive business plan before applying for a business loan. Having a proper business plan will not only increase the chances of your business loan approval but also help you fetch a competitive interest rate.
Your credit score is an essential aspect that determines your creditworthiness and repayment capacity. Financial institutions will check your credit score when you apply for a business loan. A high credit score will reflect your financial stability. It will help you avail a business loan with more benefits like lower interest rates and flexible tenure or repayment terms. Therefore, before applying for a business loan, you must make sure that you have a high credit score. By making timely repayments and clearing outstanding dues, you can boost your credit score over a period of time.
Business loans are usually secured loans. Therefore, you would be required to pledge collateral while availing a business loan. The higher the value of collateral, the greater will be the benefits. Highly valuable collateral like real estate, equipment, machinery, deposits or home equity gives security to the loan providers. After examining the collateral, lenders may grant you a higher loan amount at lower interest rates.
If you already own a business, the monthly turnover of your business is a major factor in determining your business loan eligibility. By having a look at the monthly turnover, lenders will analyze whether your business is in profit or incurring losses. It will give them a better understanding of your repayment capacity. Therefore, if you are availing a loan for business expansion, the monthly turnover plays a significant role in deciding the loan amount and the interest rate of your business loan.
Type of financial institution
Business loan interest rates may vary from one financial institution to another.
Lastly, it is advisable to read all the terms and conditions of the business loan agreement carefully before signing it. This will help you avoid any inconvenience in the later stages.