3 Crucial Factors that Affect Small Business Loan Interest Rate

Business loan interest rates tend to be variable and aren’t cut and dry, as there isn’t a blanket interest rate that is offered to all customers alike. Usually, the country’s economic climate determines the range of interest rates that your lender can offer. Similarly, your business and financial profile dictates the particular interest rate you get. Obtaining affordable funding helps you channelise more of your cash flow to your business needs and thereby generate larger revenues. 

To access business financing economically, learn about these 3 crucial factors that affect your  business loan interest rate in India that you have control over.

Credit score and repayment history

Your credit score is a metric, generally ranging from 300 to 900, that summarises how you have carried out repayments in the past. If you have a history of defaults, then you are likely to have a low credit score and incur a higher interest rate. Lenders do this to mitigate the risks involved in offering the loan.

Normally, a credit score of 750 will suffice to fetch you an economical interest rate on your business loan. If you don’t have a high score, start being faithful to the bill payments you currently make. Alternatively, when in urgent need of funds, consider obtaining a loan with a co-applicant who has a good credit score. 

Business type and vintage

Lenders normally evaluate the type of business you have before fixing the business loan interest rate. Some businesses may involve more inherent risks than others. For example, if you intend to run an e-commerce platform, lenders may be wary of offering the loan because of the stiff competition that already exists in this arena. Similarly, a restaurant business may or may not click. 

While assessing your business, lenders also consider your business’ vintage, that is, the number of years it has been in operation. Having a business that has survived the test of time can get you a low interest rate, especially if your returns are profitable. Generally, lenders require a business vintage of 3 to 5 years to offer you a nominal business loan interest rate.

Business model and annual turnovers

Lenders will also be curious to know how you intend to utilise the funds you seek. Having a detailed business plan shows them that your decision to take a loan is the product of a mature thought process. Demonstrate to your lender how these additional funds will work in the context of your business model and how they will translate into revenues.

Once your lender is convinced about your expected turnover and is satisfied with the ones you have made in the past, you can be certain of a favourable interest rate that you are looking for business finance. With repayment secured, loan terms become less stringent and more cost-effective. 

While all these factors fall at one end of the spectrum, another factor that affects your business loan interest rate is the lender and the financial solution you choose. 

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