When a business person walks into a bank or NBFC, the interest rate they walk out with for a business loan can vary widely. Typical business loan interest rates could be in the range of 14% to 25%. You may wonder why there’s such a large variation when you apply for a business loan? The business loan interest rate is decided by a combination of many factors like your credit score, business age, collateral offered, business model, cashflow, and other lender-specific factors.
The banks and NBFCs check your credit score from rating agencies like CIBIL. Your loan application has a better chance of being approved if your CIBIL score is above 750 points. With a higher CIBIL score, you can bargain for better interest rates with different banks and NBFCs to get a lower business loan interest rate.
If your business is a minimum of three years old, the chances of getting a loan at a reasonable interest rate is higher. No banks or NBFCs can afford to fund a new business with no or little history. To get a business loan at the lowest interest rate, it’s recommended you first build a strong reputation and clean payment history.
If you can offer valuable collateral like property, fixed deposits or inventory, your loan will be considered a secured loan. The bank carries lower risk to lend to you, as it can always take ownership of your collateral if you default. Business loans not backed by collateral are called unsecured loans. With unsecured loans, interest rates are higher because of the inherent risk they carry. Moreover, the type of collateral offered, and market value of those assets at the time the loan’s issued also influence the amount of loan being offered, and interest rate that will be charged.
Cash Coming In
Every business is unique in how it runs and makes money. Some businesses will need few customers to thrive. If the business loses an important customer, or a customer defaults on a big invoice, this can cripple a small business. Other businesses will have a wide, diverse customer base, which lowers the risk of a single customer or two having such a big influence on the financial success of the business. The bank or NBFC you’re dealing with considers all sources of your incoming cash, and how big your customer base is to decide on an interest rate they’re comfortable with.
Every lender looks into cash flow when lending money. If your books show poor or irregular cash flow, the banks will charge you higher interest rates. Some businesses have seasonal cash flow only, and need short-term loans with flexible payment terms to survive the lean months. Depending on your specific needs, the interest rate offered will vary from year to year, depending on both your needs and market conditions.
Consider the Overall Cost of Borrowing
When you apply for a business loan, it’s not just the rate of interest you pay that can dig into your pockets. You need to consider the overall picture while calculating your actual borrowing cost. Some banks charge higher processing fees that nullify the benefits of a lower interest rate. Also, many banks penalize you if you prepay your loan earlier than the agreed up length of the business loan. Obviously, they lose interest profits when you prepay.
Consider Flexible Loan Options from Select Lenders
Some reputed NBFCs like offer you a flexible loan with a flexi loan facility. Business loans that are offered from these types of lenders will also have several pre-approval stipulations. Although the interest rate may appear higher on flexible loans, you can save a huge chunk of interest by only taking out what you need, when you need it.
You can also repay the loan whenever you wish. Once approved, you can withdraw and repay multiple times as per your needs. With flexi loans, it’s not only interest cost, but overall flexibility you receive in terms of minimum and maximum loan amounts offered, meaning the cash is there, but you don’t get charged interest on money you may not necessarily need.