Both start-ups and existing businesses require additional funds at the right time to maintain a healthy cash flow. In such a scenario, one of the most dependable credit options they can choose is a business loan. Using the funds, one can cover the working capital deficits and perform a range of daily business operations without hassle. 

Nonetheless, it is also vital for borrowers to ascertain that by opting for a loan, they are not incurring debt which they cannot repay conveniently. Hence, assessing affordability and borrowing cost becomes imperative for business owners. One must check the business loan interest rate on offer from various lenders and then decide the loan amount accordingly. 

Following are some of the crucial factors that influence the interest rates of a business loan. 

1. Business type 

Businesses can be of different types, and based on this parameter, lenders levy the business loan interest rate. Following are the business types eligible for this fund – 

• Self-employed professionals – Doctors, CAs, Architectures come under this category.  
• Self-employed non-professionals – Generally, retailers, traders, suppliers and the likes come under this category. 
• Entities – Private limited companies, partnership firms, proprietors, etc., come under this segment.  

Business vintage is another crucial factor that lenders consider while deciding the interest rate. Usually, vintage should be a minimum of 3 years to qualify for a business loan.

2. Credit score 

Lenders consider the credit score of both the applicant and the company concerned while approving a business loan. The credit score of the applicant as well as the company should preferably be 750 and above.

Since credit score to a great extent indicates the repayment capacity of business owners, lenders take this aspect with utmost seriousness while deciding the business loan interest rate. 

There are, however, certain things you can do if your business credit score is low to ensure that conditions become more favourable.

3. Risk profile of a business 

The risk profile is determined primarily based on the business’ credit profile and how many years it is running. 

Lenders assess the risk factor of businesses and then offer the interest accordingly. For instance, lenders may add a separate premium to existing interest rates if it deems a borrower to be high-risk. 

4. Business revenue 

One of the best ways to reduce the risk profile of a business is increasing its annual turnover. It will ascertain the lender about the repayment capability and on-time EMI payment. 

Along with increasing the assets, you should also know how to cut costs without affecting your business growth. To check the cash flow of your business, you should check the balance sheet regularly. 

Depending on the profitability of your business and projected revenue, lenders determine the business loan interest rate. 

5. Loan amount and tenor

Typically, the loan amount and tenure also play a crucial role in deciding interest rates. Lenders generally tend to increase this rate for a higher loan amount simply due to the risk associated with it. 

On the other hand, if you want to settle for a lower interest rate, you need to choose a longer tenor that eventually lowers the EMI outgo. You can also use a business loan interest rate calculator to arrive at an EMI that seems feasible to you. Select financial institutions like Bajaj Finserv offer a business loan of up to Rs.45 lakh with a competitive interest rate. 

They also extend pre-approved offers that make the loan application process straightforward and prompt. Besides business loans, such offers are also available on a range of unsecured funds like personal loans, credit cards and others. You can check your pre-approved offer simply by entering your name and mobile number. 

6. Market scenario 

The interest rate on a business loan also depends on several macroeconomic factors. For instance, the current market scenario, inflation rate, repo rate, etc., often influence the interest rate offered by lenders. 

These are the most important factors that influence business loan interest rates. After knowing them, business owners can adopt financial practices to help them get the best rate possible.