What Factors Determine the Interest Rate of a Business Loan

High business loan interest rates can result in higher EMIs (Equated Monthly Instalments), putting a strain on your cash flow.  

As a business owner, securing a loan with a favourable interest rate is crucial. But what determines the interest rate of a business loan? Is it solely your credit score, or do lenders consider other factors such as loan amount and tenure? As a business owner, how can you avoid overpaying on interest rates while securing the funds you need? 

This article will explore the key factors lenders use to determine business loan rates and provide actionable tips to help you secure loans with favourable rates. 

Top Factors Influencing the Interest Rates of Business Loan

Various factors affect business loan interest rates, ranging from the borrower's credit profile to the overall health of the industry. Here’s a breakdown of top factors to help you understand how lenders determine the best rates for your business needs. 

Creditworthiness

A strong credit score often helps secure lower business loan interest rates. Conversely, a low score indicates a higher risk for lenders, leading to higher rates or even loan rejection. Lenders assess a borrower's financial history, repayment patterns, and outstanding debts through the CIBIL score. A score of 750 or above can significantly increase your chances of approval for low-interest business loans. Therefore, it is essential to regularly monitor and maintain a strong score.

Loan Type

Secured loans, which are backed by collateral, tend to offer lower rates due to the reduced risk for lenders. Unsecured loans, on the other hand, may carry higher rates as they lack collateral security. 

For example, a business owner offering property or equipment as collateral may receive a lower interest rate compared to someone opting for an unsecured loan. 

However, secured loans increase the risk for borrowers, as they could lose the collateral in the event of default. It is essential to compare business loan interest rates between secured and unsecured options to select the best fit for your situation. 

Loan Amount

Higher loan amounts may attract lower business loan rates, as they generate more income for lenders. Smaller loans, conversely, may come with slightly higher rates. On the other hand, some lenders may offer smaller loans with lower interest rates for a lesser exposure to risk. Carefully assess your business needs and borrow only what is necessary to maintain a healthy cash flow, manage overall loan costs, and ensure ease of repayment.

Repayment Tenure

Longer repayment terms may come with higher interest rates because they leave more time for the borrower’s repayment capacity to be affected by economic conditions and business fluctuations. It is essential to choose a business loan tenure that balances your monthly repayment capacity with overall interest costs. A business loan EMI calculator can help estimate the impact of different interest rates, tenures, and loan amounts on your monthly outflow.

Industry Health

Lenders assess the financial stability and growth potential of the borrower’s industry. High-risk sectors often face higher rates due to increased chances of default. Businesses in stable or thriving industries have a better chance of securing lower rates. Keep well-organised financial records and emphasise positive industry trends when applying for loans to increase your chances of securing the best business loan rates.

3 Tips To Secure a Business Loan With Low Interest Rate

A business loan not only supports immediate cash flow needs but can also help build your company’s creditworthiness for future borrowing opportunities. Follow the tips below to secure business loans with lower interest rates: 

1. Maintain a High Credit Score: Aim for a CIBIL score of 750 or higher by paying existing dues on time and maintaining a credit utilisation ratio below 30%.
2. Show Consistent Revenue and Cash Flow: Lenders need assurance that your business has a reliable source of income to cover loan repayments. Demonstrating consistent revenue and positive cash flow will help prove that your business is financially stable and capable of handling a loan without the risk of default.
3. Evaluate and Compare Options: Research and compare current business loan rates across multiple lenders to find the most competitive option. This can help you identify opportunities to reduce your interest rate and secure a more cost-effective loan.

Conclusion

By understanding the key factors that influence business loan interest rates and implementing the tips outlined, you can avoid being burdened with higher interest costs. Securing a loan with lower interest rates can help you manage your cash flow effectively, invest in growth opportunities, and achieve your business objectives.

At SMFG India Credit, you can apply for unsecured business loans of up to INR 75 lakhs*. Eligible businesses can avail of some of the most competitive interest rates in the market, with flexible repayment tenures of up to 48 months. Apply online today or visit your nearest branch for personalised assistance.