Factors That Affect Business Loan Interest Rate

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Have you ever wondered about the factors which affect the interest rates on business loans? There are several external and internal aspects which impact for Business Loans and also the interest rates. Here’s taking a look at some of these factors-

  • Rate of Inflation- This is the rate which affects currency values. This leads to a reduction in overall purchasing power since there is an opposite increase in prices of commodities. The inflation rate does impact business loan interest rates, as you will find from business loan interest rates calculators. With the lowering of overall purchasing power, rates of interest go up considerably in most cases.
  • Indian Monetary Policy- The current monetary policy as enumerated by the Reserve Bank of India (RBI) does impact business loan interest rates. The monetary policy is what determines liquidity levels and the RBI may decide to relax this for scaling up liquidity and in this scenario, interest rates go down for business loans while they go up in case the monetary policy is maintained strictly.
  • Supply & Demand- When there is higher demand for business loans, the interest rates automatically increase while if there is lower demand, they may reduce. However, interest rates are seen to be lower in case credit is abundantly available.
  • Loan Type- Rates of interest are higher for unsecured business loans which do not require any collateral to be submitted while they are lower for secured loans which have collateral requirements.
  • Credit Score- The CIBIL score of the borrower or the organization is a major factor influencing interest rates on business loans. The higher one’s credit score, the higher will be the scope of getting a business loan at a competitive rate of interest. The lower one’s credit score, the more difficult it is to obtain a business loan. Even if a loan is obtained, it comes at higher interest rates.
  • Application Timing- There will naturally be higher loan options available for businesses which are running for longer periods of time and the interest rates may be a little lower as well.
  • Annual Turnover- The annual business turnover or revenues generated is a vital factor which influences rates of interest. If turnover is high for a business, it may get a lower rate of interest and if it is on the lower side, the interest rates may be higher. For businesses with high turnover, there may be more flexible terms of repayment and they may be eligible to borrow higher amounts.

In a nutshell, these are some of the important factors that influence interest rates on business loans. These should be taken into account by borrowers prior to applying. Understanding these factors thoroughly will help you plan out the application in a manner which ensures that the loan is approved without any hassles. Lenders also take into account the industry risks depending on the state of the economy when it comes to fixing interest rates for business loans.

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