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Small Business Loan Interest Rates – Top Factors That Affect It

Small Business Loan Interest Rates – Top Factors That Affect It

Indian lending industry is growing at an astonishing rate. Non-food credit, especially short-term financing, grew at 13.1%, reaching almost Rs. 82 trillion by January 2019. It is especially popular amongst small and medium scale business owners. The vast SME and MSME industry across the nation often resort to these types of finances to mitigate their immediate financial requirements and to uphold adequate working capital for their business start up.

Lenders offer these types of finances with several borrower-centric features, like flexible tenor, easy-to-meet eligibility criteria, and affordable business loan interest rates. It helps a borrower repay the debt without getting burdened by excessive EMIs.

However, financial institutions are unlikely to offer the lowest rates of interest if a borrower does not meet all their eligibility criteria. There are certain factors that an applicant has to remember while applying for start up business loan and adjust accordingly, to enjoy the best interest rates available in the market.

Let’s take a look.

Credit score

Credit score is probably the most crucial factor which determines the business loan interest rates offered to the borrower. Lenders evaluate the applicant’s credit score to evaluate their creditworthiness; timely repayment history, zero defaults, and good credit utilisation ratio denotes that the organisation is responsible with its finances and has a high chance of repaying the business loan.

Financial institutions usually prefer companies with a credit score of 750 or higher. Borrowers are likely to benefit from the lowest interest rates and considerable loan amounts if they fall within this threshold. Business with a poor score can follow some tips to maintain a good organisational credit score like regular bill payments, low debt, segregating personal and business finances, etc.

Business tenor

An organisation’s total time in business is a crucial business loan eligibility criteria lenders look for. A long-running enterprise is likely to have a stable operation and excellent market performance, ensuring higher reliability and chances of repaying the debt within time. Lenders are also expected to lower the interest rate for a long-running business.

Revenue

Another major factor that defines business loan eligibility and interest rate is its annual revenue. Lenders may charge a higher rate or outright reject a loan application if an organisation is not earning a certain proportion of the total amount of requested credit. It increases the risk of default as the borrower may face difficulty repaying the loan and keeping its operations going.

Type of business

Organisations dealing in market volatile products and services may face difficulty availing competitive business loan interest rates in India from a lender. The risk involved with lending to these organisations increases the interest.

The best business ideas in India and organisations dealing in those sectors are likely to secure a more substantial loan amount as well as a lower interest rate as they have a higher growth perspective. Also, companies with an achievable short-term and long-term business plan will be preferred by lenders as they have a predetermined strategy to expand their operations.

The above-mentioned factors are some of the most important ones that affect the interest rate of a small business loan. An organisation should check their credibility against these pointers before they apply for such a credit.

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