Factors that Banks and NBFCs Consider When Calculating Business Loan Interest Rates
When you have a long cash conversion cycle, you may need to access funds for your firm, be it for working capital, marketing expenses, or machinery maintenance costs, in the form of a business loan. While applying for business finance is easier today with online application, the interest rate you are offered impacts how affordably you can repay it.
In this regard RBI’s rates and the economic climate affect the interest you are charged by the lender, but note that the rate you are offered may differ from what your contemporaries are given. This is because lenders calculate your business loan interest rate based on certain factors related to you and your firm.
Here are 5 such factors you should know when it comes to business financing.
Your and your business’ credit score
The first thing that lenders look into when calculating business loan interest rate is the credit score of your enterprise. They also consider your personal credit score to check your ability to repay the business loan, should the business default. So, work towards building a good credit score and maintain it to avail loans at affordable interest rates. Having a score of more than 750 helps in securing better interest rates.
Nature of your business
Certain types of businesses like mining, fireworks manufacturing, and arms and ammunition manufacturing are riskier than others. In such cases, lenders factor in the risk posed by business and cover their interests by charging you a marginally higher interest rate. Apart from this, lenders also consider the prevailing market conditions of the industry your enterprise belongs to.
Age of your business
Lenders also consider the number of years that your business enterprise has been in the game for. A younger business enterprise is considered to be riskier and so, lenders charge a higher interest rate. However, the opposite is not always true. Other factors such as the ones mentioned above have a bearing too.
Profits of your business
As a business owner, earning profits is your main objective, but this has another benefit. Lenders are happy to see that your business is profitable as this means your enterprise is capable of making timely repayments in full. In effect, you may be offered a low interest rate as you’re a low-risk applicant.
Cash flow of your business
Having a positive cash flow on a daily basis means that you receive more cash than what you spend. This is another reason for lenders to believe that you will be able to pay EMIs on time. In this case, the opposite is also true. Inconsistent cash flow points to financial mismanagement and may result in lenders charging you higher business loan interest rates.
Now that you are aware of the factors that impact your business loan, work on your shortcomings, if any, to get a better deal. Moreover, compare various loan offerings based not only on interest rates, but also features that make repayment easy. For instance, in addition to a significant loan amount up to Rs.30 lakh at a nominal rate of interest, Bajaj Finserv Business Loans offer other facilities that help your business thrive, such as the absence of collateral.
Moreover, with the convenient Flexi Loan facility you can withdraw funds as per your requirements from your sanction and pay interest only on the utilised amount. You can also choose to pay interest-only EMIs and repay the principal amount at the end of the tenor. This helps you save on payments and manage cash flow better. Through the tenor, you can use the principal amount to meet other pressing needs like buying raw material, paying salaries, and more.
With funds that come with 24-hour approval, you can meet your most urgent business finance needs with this loan. To further expedite access to funds, check your pre-approved offer from Bajaj Finserv.