How do Economic Factors Impact Interest Rates for Business Loans?
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Operating or expanding an enterprise generally requires large capital funds. Often, owners had to dip into their savings in order to keep their enterprises running. However, if you are short on working capital for your venture, you can always get a business loan.
So, the amount that you will have to pay to service the loan depends on the rate you get. There are certain factors that influence this rate, and you should know about them.
For an overview and to know the factors that impact, read on.
What are Business Loans?
Business loans are usually unsecured instruments. Owners and self-employed professionals can get a credit to meet unexpected expenses, working capital needs or even planned requirements.
To fund their commercial needs, most banks and NBFCs offer term and flexi loans. The following individuals/entities can funds for their company’s financial needs:
• Self-employed persons or professionals
• Sole proprietors
• Partnership firms
• Privately held companies
Factors Impacting Interest Rates
There are certain individual factors like creditworthiness and vintage that affect the borrowing rate. These are related to your eligibility and are in your control.
However, there are also some macro factors that have a bearing on bank rates. Some of these factors are as follows.
However, there are also some macro factors that have a bearing on bank rates. Some of these factors are as follows.
Monetary Policy
Monetary policy is governed by the central bank of any country. It aims to manage the money supply in an economy. It also works to achieve the desired levels of macroeconomic factors, such as:
• Inflation
• Supply
• Growth
• Consumption
In India, the RBI has been entrusted to manage monetary policy using various instruments like open market operations, credit control, and repo rates, etc. When it employs any of these instruments, it affects the lending rate.
The change in rates has a subsequent effect on the supply of money in the economy. When inflation rates are lower, it adopts an expansionary monetary policy by reducing borrowing rates and increasing supply.
On the other hand, when inflation is high, it employs a contractionary monetary policy to reduce the money supply and increase the rates. This affects the rates when you apply for these loans.
Government Schemes
Through its various entities, the central government offers multiple lending schemes for small and medium enterprise. Since these schemes primarily incentivise lending, they offer subsidies as well as lower interest rates.
The following are some of the schemes run by the Government of India to facilitate small and medium ventures:
• MSME Scheme: This scheme offers financial assistance of up to ₹1 Crore to organization from the MSME sector at 8% p.a.
• MUDRA Scheme: MUDRA scheme offers a credit facility of up to ₹10 Lakhs for micro and small enterprise at an ROI of 7.30% p.a.
• Credit Guarantee Fund Scheme: Industries from the MSME sector can get up to ₹10 Lakhs without any collateral under this scheme
By qualifying under these schemes, you can avail of an investment at a nominal cost.
State of the Economy
The prevailing rates in any country reflect the overarching climate. People are generally confident about their finances when the economy grows without any hiccups.
In such a setup, consumers are generally willing to spend more, which spurs demand. In order to curtail subsequent inflation, the Reserve Bank of India takes steps that lead to lenders increasing the rates.
On the other hand, when an economy faces a slowdown, stagnation or recession, the demand can get affected. A slump in demand triggers a slowdown in growth, and culminates in a general downturn.
In such conditions, it takes steps that help lenders reduce prevailing rates in order to pump money into the economy and increase consumer demand.
No matter what the situation is, by having a good credit score and strong personal and professional finances, you can take a commercial loan with ease. Remember to meet all the lender’s eligibility criteria to further get a competitive rate.
Last but not the least, use an EMI calculator to see the impact of the rate on your EMIs. Make your choice by comparing various rates in the market before you apply.
Disclaimer: No Business Standard Journalist was involved in creation of this content
Topics : loan
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First Published: Jun 27 2023 | 4:56 PM IST