Business operations often require additional funding to fund growth opportunities. In these cases, business loans are a popular choice for business owners who are looking to start a new business or expand an existing business venture.
When business owners apply for loans, one of the most important factors is the business loan interest rate. The business loan interest rate in India can vary based on multiple factors such as the borrower's creditworthiness and the prevailing economic conditions. Therefore, it is important to understand the various factors that influence business loan interest rates and make informed decisions to get the most favourable business loan terms and conditions.
In this article, we will explore the various factors that influence business loan interest rates in India and the different business loans offered by Shriram Finance that have attractive interest rates starting from 15%* p.a. Book now and find the right type of Shriram Finance business loan!
Key Highlights
- Business loans are a popular choice for business owners looking to start a new business or expand existing business ventures.
- Business loan interest rates depend on various factors such as loan amount, repayment tenure, credit score, benchmark calculation, collateral and economic conditions.
- Shriram Finance offers business loans at attractive interest rates starting at 15%* p.a. with flexible repayment tenures and minimal documentation.
- Shriram Finance offers various types of business loans, including working capital loans, machinery loans, equipment loans, business loans for women entrepreneurs, startup loans, a business credit card and more.
What Determines Business Loan Interest Rates?
Before applying for a business loan, learn about some of the most common factors affecting business loan interest rates:
1. Credit Score
One of the most significant factors that influence business loan interest rates is credit scores. The credit score is an indicator of the borrower's creditworthiness and repayment capacity. A higher credit score indicates a lower risk of default, which means the business owner is more likely to get approved for a loan with a lower interest rate.
On the other hand, a lower credit score may result in a higher interest rate, as lenders may consider a lower score to be a higher risk. If a credit score is less than perfect, business owners can still qualify for a business loan, but a higher interest rate might have to be paid to compensate for the increased risk.
Therefore, it is essential to maintain a good credit score by paying bills on time, reducing the debt-to-income ratio and avoiding opening too many new credit accounts.
2. Benchmark Calculation
The benchmark calculation is another significant factor that influences business loan interest rates. Lenders use benchmarks to calculate business loan interest rates. Examples of this include the London Interbank Offered Rate (LIBOR) or its Indian version, the Mumbai Interbank Offered Rate (MIBOR), among others. These rates are the starting point when lenders offer loans to customers.
3. Loan Tenure
Loan tenure refers to the period for which the loan is taken. Long-term loans, which have longer repayment periods, generally come with higher interest rates than short-term loans, which have shorter repayment periods. This is because long-term loans are riskier for lenders since there is a greater chance of economic and market fluctuations that could affect the borrower's ability to repay the loan. To calculate EMIs, use the Shriram Finance business loan calculator and get quick and accurate results.
4. Type of Business Loan
The type of loan that a borrower chooses can also affect the business loan interest rate. For example, secured loans, which require collateral, generally come with lower interest rates than unsecured loans, which do not require collateral. This is because secured loans are less risky for lenders since the collateral can be seized to recover the money if the borrower defaults on loan repayments.
5. Type of Business
The type of business that is seeking a loan can also impact the business loan interest rate. Lenders assess the risk involved in lending money to a business. Therefore, the type of business can significantly impact the level of risk involved.
Manufacturing businesses typically have tangible assets such as machinery, equipment and inventory, which can be used as collateral in case of a loan default. As a result, these businesses are considered less risky and may receive a lower interest rate.
In contrast, service-based businesses, such as consulting firms or marketing agencies, may have fewer tangible assets. This may make it challenging for lenders to secure collateral, thereby increasing the risk of default. Hence, lenders may charge a higher interest rate to mitigate the risk.
6. Business Financials
Lenders will usually consider the financial statements of the business, including the balance sheet, profit and loss statement and cash flow statement when determining the interest rate. These statements provide insight into the financial health of the business, its profitability and its ability to repay the loan. If the business is profitable and has steady cash flow, the business owner is more likely to get approved for a business loan with a lower interest rate. However, if the business is struggling financially, the business owner may have to pay a higher interest rate to compensate for the increased risk.
7. Collateral
Collateral is an essential aspect of business loans, as it provides lenders with a safety net in case the borrower defaults on the loan. Collateral can also impact the business loan interest rate. A borrower who offers collateral may be eligible for a lower interest rate than one who does not. The presence of collateral assures the lender that in case of default, the collateral can be seized to recover the money. Furthermore, the type and value of collateral can also influence the interest rate. Liquid assets, such as cash or marketable securities, may be associated with lower interest rates as they can be easily converted to cash in the event of default. In contrast, assets such as real estate or machinery may be associated with higher interest rates since they are harder to sell.
8. Economic Conditions
Economic conditions such as inflation and GDP growth can also influence business loan interest rates. Inflation can increase the cost of borrowing, while a strong economy may result in lower interest rates. During periods of economic growth, interest rates tend to be lower as lenders are more willing to take on risk to finance business growth. However, during periods of economic downturn or recession, interest rates tend to be higher as lenders become more risk-averse and require more significant returns to compensate for the increased risk of default. These factors can be challenging to predict, making it essential to consider long-term trends when applying for a business loan.
Summing Up
The business loan interest rate in India is affected by various factors, including credit score, loan amount, type of loan, business financials and economic conditions. It is essential to understand these factors to make informed decisions and get a business loan with the most favourable interest rates for business owners. Apply now to get started on the loan application process for Shriram Finance's various business loans with minimal documentation and quick disbursals.
FAQs
1. What is considered as a good credit score?
A good credit score can improve one's chances of getting a loan. A credit score between 580 and 669 is generally considered fair, a credit score between 670 and 739 is considered good, a credit score between 740 and 799 is considered very good, and a credit score over 800 is considered excellent.
2. Are there business loans specifically for women entrepreneurs?
Shriram Finance offers business loans for female entrepreneurs between the ages of 24 and 70, which is the same age requirement for all other Shriram Finance business loans.
3. What are the types of business loans offered by Shriram Finance?
Shriram Finance offers various business loans to meet the specific needs of different types of businesses. This includes working capital loans, machinery loans, equipment loans, startup loans, a business credit card and more.
4. Is collateral required to get a business loan from Shriram Finance?
Shriram Finance offers both secured and unsecured business loans. The collateral may include property, machinery or any other tangible assets.
5. What is the EMI calculator, and how can it help me with loan planning?
Shriram Finance's business loan calculator is a useful tool that helps borrowers plan loan repayment by calculating the equated monthly instalments (EMI) based on the loan amount, interest rate and tenure. The calculator can be used to determine the EMIs for various loan amounts and tenures.
