5 Factors That May Affect Your Business Loan Interest Rates

If you want to take a loan for a business, the first question that comes to mind is: what would be the interest rate? There is no fixed number that applies to everyone. Banks and lenders take into account multiple factors before deciding the final interest rate applicable in your case.

Let's look at the 5 key factors that may affect your business loan interest rates, so you can better prepare and possibly lower your borrowing costs.

1. Your Credit History Counts

Lenders will always consider your credit history and credit score before approving a loan facility for your business. Good credit practices you have previously exercised can help you lower your interest rate. E.g if you've paid on time and maintained a strong credit score, you're likely to enjoy a lower business loan rate of interest.

• Missed payments or past due defaults may result in higher interest rates.
• For newer businesses, your credit score plays a bigger role.
• Any score above 700 is generally considered reliable.

Building your credit score gradually by clearing dues and keeping credit usage low will help you in the long run.

2. Loan Type and Repayment Duration

The category of loan you apply for and the period over which you plan to repay it directly affect the interest rate. A longer tenure might offer lower monthly payments, but leads to more interest paid overall.

• Term loans, overdrafts, and working capital loans all come with different pricing.
• Short-term loans are often more expensive due to the higher perceived risk associated with them.
• Flexible terms may also affect the final business loan interest rate.

Choose what suits your cash flow and what is in future. Don't over-extend.

3. Financial Health of Your Business

When you seek a business loan, lenders will analyse the performance of your business. For example, institutions like IDFC FIRST Bank often review key financial indicators such as profit margins, revenue stability, and overall expense management before proceeding with your loan application.

• Good cash flow gains the confidence of the lender.
• It is healthy when the ratio of debt to income is low.
• Tax filings and audit reports give extra weight to your application.

Ensure your accounts are organised, up-to-date, and ready to present at any time.

4. The Industry You Operate In

Your line of work matters more than you think. Lenders classify industries based on the risk associated with lending to them. If your business falls in a high-risk sector, you may be charged a higher interest rate on your business loan.

• Entertainment and hospitality might face scrutiny.
• Healthcare and essential services are often considered safer investments.
• Even location-based risks can influence the lender's decision.

You can't change your sector, but you can prove your business model is sustainable.

5. Whether You Offer Collateral

If you provide an asset to back the loan, your risk profile drops. This usually translates to a more affordable business loan rate of interest.

• Security may be given in machinery, vehicles or property.
• Unsecured loans are faster to obtain but have high interest rates.
• Even without collateral, a good financial track record is also advantageous.

Consider what you can provide and its value seriously.

Final Thoughts

Applying for a business loan is not just a matter of filling out forms. By knowing the factors that can influence the interest rates on your business loans, you will be in control of the process. Prioritise that which you can influence, e.g. the credit behaviour, any documentation and choice of loans and you will be in a better position to negotiate good terms. When a borrower is well-prepared, they usually get a better deal.

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