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How to save the interest amount on a business loan?

How to save the interest amount on a business loan?

How to save the interest amount on a business loan?

Doing a business is all about dealing with its ups and downs. The one mantra to remember is that risks and rewards are inevitable, and often one factor outshines the other. Well, this may sound especially challenging for those who have just started a business and do not have adequate funds to support activities such as payment of wages, expansion of the business, a new project, or acquisition of a new asset. Moreover, competitive market scenarios may lead to a loss in working capital and low income. This is when the banks act as the saviors by providing loans to finance the business and its activities.

Business loans allow you to continue running the business smoothly at the time of any financial crisis, and therefore, are an essential tool in modern times.

You may take business loans to launch a new project, extend the existing business to a new site, and purchase new equipment, office space, and properties. 

Some of the benefits of a business loan are:

  • Tax benefits

As per the Income Act section, the amount required to repay the loan is exempted from tax.

  • Business Growth

Finance is the backbone of any business, which ensures that every requirement of technology, workforce, marketing is met effectively and efficiently. This further helps in expanding the business to a larger scale. All of this requires good working capital, which a business loan can help to achieve.

  • Easy availability

With various banking options available in the market, today it’s much easier to procure loans at attractive interest rates from different banks and NBFCs. Some banks even provide loans without collateral. Moreover, with their built-in online EMI calculator, it becomes easier to compare and avail these loans.

There are two types of business loans:

1. Secured business loans

2. Unsecured business loans

While secured loans are loans taken against security kept as collateral with the bank, unsecured loans are loans without any such collateral. Needless to say, secured loans have lower interest rates as compared to unsecured loans.

In India, interest rates for business loans start at a 15% minimum per annum. However, the interest rate varies depending on multiple factors such as credit score, the business plan, loan amount, and repayment schedule with other financial aspects.

Two different interest rate models are available: decreasing interest rates and flat interest rates.

  • Reduced interest rates

As the creditor commences paying the loan payment, the principal sum decreases. Therefore, the interest applies to the remaining balance of the principal and not the initial amount lent. This method is known as the reduction in the interest rate.

  • A flat interest rates

Contrary to the decreasing interest rate, the technique to calculate the interest rate on the initial credit sum is a flat interest rate. After paying one or more installments, it fails to accept the diminished value of the principal.

A lower-paying interest loan will not only save a lot of time and money for the business but will also help you to repay the debt sooner and better. But how can you achieve this?

Here are a few tips that can help you to lower your interest rate

1.Raise your credit score

The credit score is what defines a company’s creditworthiness. The credit scores of small businesses or proprietorship businesses are often seen in the same light as that of an individual. Improving your score means reducing your credit utilization ratio, which is the ratio of the credit limit available and the credit limit used. In other words, the amount you have divided by your credit limit. Therefore, a better score can help you to achieve a lower interest rate. One must always keep the credit utilization ratio up to 30% of the overall limit.

2.Don’t Default your EMI

EMI or Equated Monthly installment is the standardized deduction of your loan. If you repay the loan without any defaults in the EMI, you improve the chances of obtaining lower interest rates as a token of gratitude from your bank. If you keep your repayment history strong, the banks will favor you for being an excellent client.

3.Improve your business financials

A profitable and flourishing business can help you obtain lower interest rates from banks, as the interest rate calculations often depend on various factors, including the financial position of the company, the upcoming projects, and the turnover of the same. So, if you want lower interest rates, improve your financial statements.

4.Research and refinancing

Some of the competitive banks often offer lower interest rates as compared to your existing rate. In such a case, you can easily do a balance transfer of the loan, which is basically where the second bank repays your current loan and offers you the balance payment with a reduced interest rate in the form of a business loan.

5.MSME business loan

MSME, i.e. Micro, Small, and Medium Enterprises is a government sector, which aims at promoting the growth and development of businesses, and therefore, offers lower interest rates and easy repayment terms. If your business fulfills the eligibility criteria, you can easily avail and repay your existing loan.

6.Business history

Vintage business proves higher credibility for business, which improves the chances of getting lower interest rate as it positively boosts the business profile.

Some other options that one can look for to lower the interest rates are as follows: 

  • Do not cancel old credit cards or accounts.
  • If a secured business loan is necessary, offer or apply valuable collateral or protection.
  • Instead of a short-term business loan, apply for a long-term one.
  • Apply for a loan with one of the top private or public sector banks.
  • Always calculate your interest rates using the business loan EMI calculator.

A business loan calculator can assist you to ascertain the amount of loan you are eligible for, which is based on your net profit after tax. It also helps to assess and plan your repayment schedule, and to know the bifurcation of your interest and principal amount. But one should keep in mind that the business calculator is just to ascertain the values and the actual value of the loan will depend on various factors such as business profile, credit scores as discussed previously.

A lot of smart entrepreneurs prefer NBFCs over banks to avail loans, as banks have more demanding rules and restrictions in terms of lending loans in comparison to NBFCs because while Banks come under the Banking Companies Act, the NBFCs come under the Companies Act 2013, which allows faster loan processing and easier disbursals with minimum documentation and paperwork.

Do keep the above points in mind to reduce your interest rate on loans and you will end up saving a lot of money over the remaining duration of the loan.

Get a business loan at low interest rates