Whether you want to expand your operations, buy new equipment, or build your working capital, a Business Loan can make a big difference to your business success. However, it is essential to know the factors that determine the Business Loan interest rate prior to applying. Let’s look at some of the main factors that affect the interest rate, and how you can manage those when applying for a Business Loan online.
- Credit Score and Financial Track Record
Your credit score is one of the most important factors that influence the Business Loan interest rate. Simply put, it reflects your ability to repay borrowed funds based on how you have managed your credit in the past. A higher score reflects a good track record of money management in relation to repayment. If your credit score is strong, you will be rewarded with a low rate of interest. Alternatively, someone with poor credit or an inconsistent credit history is seen as a high-risk borrower by lenders, resulting in a higher rate. Major lenders like L&T Finance require a minimum of 6 months* of credit history to decide on the applicant’s eligibility for a Business Loan.
To ensure building a decent credit score, be sure to pay your EMIs and bills on time, and keep your credit utilisation ratio low.
- Nature and Stability of Business
The nature of business and its financial stability also matter. Lenders want to ensure that your business model is safe and consistently profitable. For example, businesses in stable industries like health care are usually considered lower risk. Similarly, if you have been successfully operating your business for several years with consistent income, you have higher chances of securing a better Business Loan interest rate than a newly opened business.
When you apply for a Business Loan online, providing financial statements, tax returns, and business plans works to your advantage.
- Business Turnover and Profitability
A decent turnover and consistent profitability show that your business has a higher chance of generating enough revenue for repayment. If your financial statements show profitability, lenders will be more inclined to present you with a more competitive Business Loan interest rate. On the contrary, inconsistent income or dependence on seasonal sales makes lenders more cautious about lending you money. Maintain organised and up-to-date financial records and pay taxes on time to showcase your professionalism.
- Type of Business Loan
Loans that are secured with collateral can have lower interest rates. However, unsecured loans do not have collateral associated with them. That means a lender charges a higher interest rate for an unsecured loan to mitigate the risk. If you are sure of timely repayment but do not want to pledge your assets as collateral, apply for an unsecured Business Loan with better eligibility and credit history.
- Market Conditions and Economic Factors
External factors, such as inflation, monetary policy, and RBI repo rates, largely influence interest rates. When inflation is high or the central bank increases benchmark interest rates, borrowing can become more expensive. In periods of stable economic growth, lenders may offer lower interest rates, reducing the Business Loan rates.
While these external conditions are beyond your control, stay aware of the market fluctuations and choose a better time to apply for a Business Loan online.
- Relationship with the Lender
Your relationship with the lender also plays a critical role in determining your interest rate. If you have had a great repayment history with the lender, the lender may offer you better terms or lower interest rates on the Business Loan. Lenders often give eligible customers priority rates or quicker response times on financing. Carrying a positive financial reputation with the lender is beneficial. Have transparent communication with lenders and pay your financial obligations promptly.
- Lender’s Policies
Every bank or other financial institution operates according to its internal policies for evaluating lending risk. These policies dictate the amount of risk the institution may take and what rate it will charge for it. When you apply for a Business Loan online, the lender’s algorithms and underwriting processes will evaluate your creditworthiness. When comparing Business Loan offers, know which lender works best for your circumstances.
Conclusion
When assessing a Business Loan, taking care of the above factors can be advantageous when applying for a Business Loan online. To get the lowest Business Loan interest rates, practice good financial discipline, maintain documentation, and choose the preferred lender who can assist you with your financing needs. L&T Finance provides customised operational solutions, transparent terms, and rapid online applications to let your business grow without financial stress.
