Since the start of the pandemic, most business owners have set their eyes on the monetary policies of the Reserve Bank of India (RBI). To maintain price stability and promote high economic growth, the RBI regulates the money supply in the economy through interest rate regulation. Even during this time of need, the RBI did not disappoint business owners and other borrowers and offered them some loan moratorium and restructuring options; they also kept the interest rate unchanged for a long time. The repo rate, which is the key lending rate, is kept at 4% while the reverse repo rate, or the central bank's borrowing rate, is kept at 3.35%. This was done to help financial institutions.
Let us take a detailed look at
business loan interest rates and the factors affecting them:
Type of Business Loans Interest Rate in India
Diminishing Interest Rate
Sometimes referred to as reducing or balance rate of interest, the diminishing interest rate is calculated each month on the outstanding loan balance. Monthly instalments include both interest and principal repayment for the outstanding loan amount. The outstanding balance decreases with each
EMI payment. As a result, the interest for the following month is computed only on the outstanding business loan amount, as lowered by this month's principal payment.
Also Read: A Quick Guide To Finding The Right Loan For Your Business Fixed Interest Rate
Also known as a
flat rate of interest, a fixed interest rate is charged on the entire loan amount throughout the loan repayment period.
To calculate interest rates, one should use a business loan interest rates calculator
. It allows you to calculate how much you will have to pay at the end of each month and plan your monthly budget accordingly.
Why Does the Loan Interest Rate Change?
At times, financial institutions borrow funds from the RBI to meet the needs of their customers. In return, the RBI charges the financial institution an interest rate, known as the repo rate. If the RBI raises the repo rate, financial institutions restrict themselves from borrowing from the RBI. Therefore, to maintain the demand-supply balance, financial institutions raise interest rates on business loans and other types of loans.
Lending rates are a part of the RBI’s monetary policy and are proportional to inflation. When prices rise due to inflation, the RBI usually increases the repo rate to discourage borrowing and keep inflation in check. From the business point of view, this is done to bring down the investment and
cash flow in the market, ensuring that the economy's demand and supply stay balanced.
Other factors influencing the business loans interest rate:
Business Profile
Do you need a business loan without security? Do you have a solid business profile? When lending business loans for small businesses, financial institutions consider business credibility, the number of years a business has been in existence, a business owner's profile, and other such factors.
Repayment History
Have you ever taken a business loan such as a
working capital loan, an equipment loan, or any other similar loan for your business? If yes, how did your payback pattern go? Have you paid your EMIs on time? These are some of the questions your lender consider when evaluating your loan application. Staying on top of your EMIs and not defaulting on any of your prior or existing loans boost your chances of getting a low-interest business loan.
Also Read: Know About the Application Process of Unsecured Business Loan Nature of Business
Do you deal in a business whose market demand is seasonal, or do you operate in a business where the working cycle fluctuates according to market conditions?
When applying for a business loan, all of these considerations become critical. Generally, financial institutions avoid lending to businesses that are involved in high-risk activities. They may either turn down your application or charge you with a higher interest rate.
Business Financial and Revenue
When lending small business loans,
financial institutions check the business’s cash flow, balance sheet, and profit and loss statement. These factors help lenders in determining the viability of your business. You must also keep your sales report and sales projection handy. Sales report gives an idea of the business revenue; having strong business financials boost your chances of acquiring a low business loan interest rate in India.
Business Plan
If you are a start-up or are seeking business loans for a small business, it will be good to create a solid business plan outlining your vision, objective, and future business actions. It has a direct relation with the
business loans interest rate. If the lender is satisfied with your business plan, you may get a low-interest small business loan quickly.
Relationship with Lender
In some cases, the business loan interest rate depends upon the lender-borrower relationship. You may be able to get better loan terms and interest rates if you are an existing client who has demonstrated loyalty to the lender by paying your debts on time.
Also Read: Factors That Determine Your Business Loan Approval Market Conditions
As discussed earlier, the business loan interest rate for 2022 depends upon the benchmark rate. It is also based on external conditions such as inflation, economic policies etc. If the market conditions are favourable, the interest rates will be lower. If it is not in favour, interest rates will rise. The base rate's entire purpose is to keep a credit check in the country. The RBI ensures that consumers' purchasing power is controlled and that there is no demand-supply imbalance in the country.
Your Personal Creditworthiness
The rate of interest for business loans is also reliant upon the borrower's personal credit score. So, before you apply for an unsecured business loan, visit the website of the credit bureau agency. From there, download your credit report and check your credit score. Report any discrepancies between the information on your credit report and your personal information immediately. Your credit report is generated after a thorough examination of your employment history, tax returns, and previous and current obligations.
Your Business Creditworthiness
The business loan interest rate in India is also dependent upon your business creditworthiness. It suggests if you have various debts for your business and your total EMI surpasses 50% of your revenue/profit, you must think twice about applying. Also, make sure you are not behind on any of your business loan EMIs.
How to Secure a Low Business Loan Rate?
Consider the following if you want to get a business loan at an affordable rate.
- Conduct extensive market research. Go through every lender's interest rate and offers. Choose the one who offers an adequate loan amount at a reasonable rate.
- If you can afford to pay a higher EMI, choose a loan with a shorter term. Short-term business loans not only qualify you for a cheaper interest rate, but they also allow you to save a major chunk of money on interest payment.
- Try to keep your debt-to-revenue percentage less than 50.
- Avoid utilising your credit card limit in excess of 30%.
To Conclude
The pandemic-affected economy has impacted all the segments of society including business owners. In an attempt to recover from the COVID impact, business owners are seeking business loans. However, before applying for this loan, you must understand the various aspects affecting the interest rate on a
business loan without security. Disclaimer: This post was first published on 9 July 2021 and has been updated for the latest information, freshness and accuracy. 
