Factors influencing Business Loan

Interest Rate

Business loan interest rates start at 13% and this is the rate charged over the principal borrowing amount. The rate of interest on business loans increases if there is a decline in value of currencies. Hence, lenders provide loan at higher interest rates if the inflation rate is high and vice versa. When you’re repaying the loan, you have to pay both the interest amount and the borrowed principal amount over a period. Take for example, you have borrowed Rs. 10 lakhs at 13% for 5 years then the interest amount payable will be 1,365,184. The monthly instalment, in this scenario, will be Rs. 22,753.

Interest rates can vary from a financial institution to another. Higher the rate of interest, greater will be the cost of loan, and vice-versa. There are several government schemes and special deals for agriculture sector, small and medium sized enterprises, and women entrepreneurs. Here, there is a discount up to 2% on standard rate applicable.

Public banks may charge a lower rate of interest than private banks and NBFCs, but you should not take this information on face-value. Many times it is the vice-versa. So, it is always better to compare rate of interest on business loan across banks and NBFCs, before finalizing on a deal. Sometimes increase of liquidity in the money market by the RBI takes place by relaxing its monetary policy. The interest rate on loans then reduces by enhanced liquidity thereby making the business loans cheaper.

Know your own borrowing limit which can be repaid easily

Nowadays, you can apply for funds online, no need to personally visit a bank branch to make a loan application and you can also find pre-approved loan offers from specific banks. But, just because a loan is easily available, you must not go for unnecessary or excess amount as compared to the actual requirement. If you still choose to borrow, request only for a loan amount you need.

So, a clear idea about the loan amount is required that will be sufficient to meet your financial requirements.

As a rule of thumb, your monthly payment towards loans must not exceed 40%-50% of your monthly income. Please ensure about the loan-to-income ratio which should be within acceptable limits.

You have to take care of other financials such as investments, retirement plans, savings for kid’s education, etc. during loan repayment otherwise the EMIs eat away at most of your income, then you will have limited disposable and insufficient income.

Timely payment of EMIs

Your timely payment of EMIs on time ensures a good credit history and score, which in future helps get the best interest rate and loan offer. You are a credible borrower according to lender’s perspective if your CIBIL score is 700+ which indicate that you are not default at payments. On the other hand, if you miss or delay payments, then your credit score can slide down thereby reducing chances of availing a loan in future.

Defaulting on payments incurs additional penalty charges. Thus, financial burden of debt increases, negatively affecting your life and financial goals.

A good Personal Credit and Business credit score will make a positive notion towards Loan availabilty

There is no basic difference between business loans and consumer loans like mortgages or student loans according to main principles. A thorough credit check is a must do by almost any potential business lender. Increase in your interest rates and fees on a business loan may happen due to poor credit score. In addition, don’t make the mistake of thinking lenders won’t care about your personal credit history. In most cases, your personal credit score plays a big role on your loan terms as your business credit score.

Business History

Proper documentation of unsuccessful new businesses has been kept since their beginning, and business lenders are well aware of this. This research resulted into difficulty for emerging businesses to attain financing, with many banks preferring loan applicants should be in business for a minimum of three years. Reasonably, many businesses require additional funding prior to the three-year mark, which can make more sense to work with an alternative lender. Typically, they are less rigid about their time-in-business requirements, only requiring an operational business for a few months.

Choose the Shortest Possible Tenure

A housing loan’s term can be as long as 30 years, while the same for a loan against property is up to 20 to 25 years. On the other hand, Personal loan term does not exceed 5 years.

Opting a longer tenure for your business loan will increase the interest payout. It is generally advised; if you have affordability to repay a loan early, then choose the shortest instalment term possible.

You can significantly save on interest paid accordingly, especially if the loan is taken on a floating interest rate. After all, it is understood that longer the tenure, higher is the compound interest.

Conclusion

On a clear note, loan terms depend on a various factors, both in and out of your control. It’s really difficult to avail a conventional business loan with a low rate of interest without a long and successful track record. Still, stay meticulous and if you can improve certain areas of your business that are mentioned above, you’ll hopefully be able to receive a loan with beneficial terms. Borrowing money for any type of personal need is a significant financial step of an individual’s life. Loans are a responsibility which cannot be dodged. Hence, before you opt for a loan, know your fund requirement and the purpose of the same by making a thorough analysis of the business plan. Moreover, consider the above-mentioned factors that can help you to take an informed decision before borrowing funds.