New Delhi: At any stage in your business’s evolution, securing funding for projects or expenses is crucial. A business loan can provide this funding; however, borrowing costs depend not only on the loan amount but also on its interest rate.
Interest rates on business loans significantly affect your finances, determining how much you will repay over the loan's duration. Finding an attractive, lower-rate option can save your business substantial amounts of money while alleviating financial strain.
This article explores business loan interest rates, their calculation, and tips to secure lower rates.
What Does a Business Loan Interest Rate Mean?
The interest rate for businessloan refers to the percentage that lenders charge on the total loan amount as the cost of borrowing. This means borrowers pay an additional amount over and above the principal loan amount as interest.
Interest rates depend on several factors, including the type of loan, the amount borrowed, the repayment schedule, and the purpose of the loan. Lenders use the interest rate to compensate for the risks associated with lending money to businesses.
How Can You Calculate Interest for a Business Loan?
The interest rate plays a vital role when taking out a business loan. It determines both the monthly interest payments and the total EMI (Equated Monthly Installments) costs over the loan tenure.
The EMI for a business loan can be calculated using this formula: 
Where:
- PPP = the principal loan amount
- RRR = monthly interest rate (annualized rate divided by 12)
- NNN = loan tenure in months
For instance, if you take out a business loan of 1,00,000 at an interest rate of 12% per annum for 12 months, here’s how you calculate the EMI: 
Using this formula, the estimated monthly installment payment is 8,885, and the total interest payment is approximately 6,619. The total repayment amount would be around 1,06,619.
While manual calculations can be tedious, lenders provide online EMI calculators that make the process simpler. By entering the loan amount, interest rate, and duration, these tools generate accurate results, helping you plan your finances effectively.
Factors Affecting Business Loan Interest Rates
Several factors influence business loan interest rates. Understanding these can help you secure loans with better terms:
1. Nature of Your Business
Your field of operation plays a key role in determining the interest rate. Lenders often classify loans based on priority or non-priority sectors.
- Priority sectors that significantly contribute to the economy but face financial access challenges may receive loans at lower rates.
- Non-priority sectors, having easier access to credit, might face higher rates.
2. Business Longevity
Lenders assess a business’s stability and sustainability when determining interest rates. A longer track record demonstrates resilience, often resulting in lower rates. Companies operating for at least six months are generally seen as lower risk.
3. Business Turnover
Lenders examine profitability and cash flow before approving loans. Businesses with steady profits and positive turnover are more likely to secure lower interest rates, while those with fluctuating or negative earnings may face higher rates.
4. Credit Score
Credit scores significantly impact loan interest rates. Scores above 700 indicate good creditworthiness, leading to more favorable rates, while lower scores often result in higher costs.
5. Loan Amount and Tenure
The size and term of a loan also affect interest rates. Larger amounts with longer repayment tenures increase lender uncertainty, potentially leading to higher rates.
How to Secure Business Loans at Affordable Interest Rates?
Here are some strategies to obtain business loans at competitive rates:
1. Maintain a High Credit Score
Lenders prefer applicants with credit scores above 700, which reflects good creditworthiness. To improve your score, pay bills and EMIs on time and clear outstanding balances promptly.
2. Choose a Shorter Loan Tenure
Opting for a shorter repayment period reduces risk for lenders, often leading to lower interest rates and decreased borrowing costs.
3. Provide Collateral
Secured loans require collateral, which reduces the lender's risk and results in lower interest rates.
4. Borrow from Reputable Financial Institutions
Established and RBI-registered lenders typically offer competitive rates and favorable terms, ensuring reliable loan deals.
5. Demonstrate Stable Income
Lenders are more likely to offer lower rates to applicants with stable incomes and a clear repayment plan that showcases the business’s ability to repay the loan.
Conclusion
Securing a business loan at a competitive interest rate is crucial for maintaining healthy cash flow and reducing borrowing costs. Businesses can secure more favorable rates by maintaining a high credit score, opting for shorter tenures, and providing collateral. Choosing the right lender also plays a pivotal role in obtaining the best terms and ensuring financial sustainability for your business.
Disclaimer: No Business Standard Journalist was involved in creation of this content