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Factors That Affect Business Loan Interest Rate

We know that business loan interest rates change from lender to lender. But most of us do not know that these rates also vary from borrower to borrower within the same bank or NBFC. There are many online resources to check business loan eligibility and interest rates. Use them to plan your loan amount. Many factors can affect these interest rates. Read the article till the end to learn more about the factors that affect the rates.

  • Credit Score

The credit score is the primary factor that can affect business loans or other loans. This is one of the main criteria for business loan eligibility. Before approaching a bank for a loan, check your credit score online. Banks may offer lower interest rates to a person with a good credit score. A person with a score above 700 has good chances of loan approval. If your score is below 700, take your time to improve it. Chances of loan approval are low for an individual with a low score, and if approved, the lender needs to pay a higher interest rate to the bank.

  • Type of Business

Yes, the type of business you plan to start can affect the interest rate. Some businesses are considered riskier than others. For such businesses, banks charge higher interest rates. On the other hand, less risky businesses get loans at a lower rate. Use the internet to calculate your business loan interest rate.

  • Business Experience

Not just the type of business, but your business experience can also affect the loan interest rate. If you have several years of experience in the same business, lenders consider it a good sign. Banks offer business loans at lower rates to individuals with previous business experience. On the other hand, if you have no business experience or minimal experience, the bank may charge a higher interest rate on your loan amount.

  • Business Plan

If you have been in the same business for several years, the bank does not ask for your business plan. But that is not the case with startups or new business owners. Banks will ask for a business plan and check where the loan amount is being used. If you are new to the business and approaching a bank for a loan, explain your business model clearly and concisely to increase your business loan eligibility. If banks find your plan has potential, they will offer loans but at higher rates.

  • Business Health

The financial health of your business can affect the loan interest rate. Banks check financial statements during the loan approval process. The lender compares business revenues with the loan amount requested by the borrower and calculates the interest rates. A business with sound financial health is considered favourable as the chances of repayment are high. For such businesses, loans will be offered at lower interest rates. In companies with bad financial health and insufficient revenues, loans may be approved but at a higher interest rate.

  • Collateral

An asset with a specific monetary value that belongs to a business owner is referred to as collateral. If the collateral amount is high, banks offer loans at lower interest rates. Because not all borrowers have the ability to provide collateral, interest rates vary. However, a growing number of lending institutions now offer collateral-free business loans at low interest rates. But to get loans without collateral, the company should have a sound business model.

Key Takeaways

  1. Maintain a good credit score to reduce your business loan interest rate.
  2. Less risky businesses can help you secure loans at lower rates.
  3. High interest rates are charged to an individual with minimal business experience.
  4. The financial health of your business matters a lot while bargaining the interest rates.
  5. The more collateral you offer, the lower will be the business loan interest rate.

All these factors will be considered when determining the interest rate on your business loan. Learning about these factors will help you plan for specific business needs. Also, it will help you select the best funding option available. Check your business loan eligibility and use an online business loan EMI calculator to plan your repayments.

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