Business loan is designed for the businesses of all types whether, small, mid, or large, to meet their business expenses. Such loans work like personal loans, which you can utilize to cover up the various business linked expenses like inventory purchase, employee salaries, marketing campaigns, office leases and others.
Today, many lenders have stepped into the risk-based pricing concept for fixing your business loan interest rate. According to this concept, your company’s credit risk is evaluated before fixing the business loan interest rate. This means, a higher rate of interest is charged if your business has higher credit risk and vice versa. This kind of risk-based pricing is highly relevant in the case of unsecured business loans where lenders do not have the underlying securities to depend on if you default on the loan repayment.
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Various parameters that affect your business loan interest rate are:
- Loan type: There are distinct loan types offered by distinct lenders. Different types of loans include unsecured loans, secured loans, short-term loans, long-term loans etc. The loan type you select largely affects the rate of interest applicable on your business loan.
- Nature of your company: There are certain companies that carry higher risk than others do and lenders consider this while setting the interest rate on the business loan.
- Business vintage: Lenders even factor in the duration for which your company has been around. Few lenders may not offer a business loan to start-ups as they have shorter business duration. In case you are unable to avail business loans owing to shorter business duration, you may approach digital lenders. Such lenders may offer business loans if your business is at least 2-3 years old and has the potential to expand in the future. However, note that such loans may be available at a heavy rate of interest owing to the involvement of high-risk factors.
- Business financials: When you place an application for a business loan, lenders usually ask you to share a copy of your financials to assess your financial status. Such financial documents include PAN card, GSTIN, copy of the current ITR form, previous six months bank statement, computation of audited balance sheet, income and profit and loss account for the past two years, continuity proof of the business etc. Through these documents, lenders view your financial position and determine your business loan interest accordingly.
- Your business credit: Lenders even review your company’s credit history before fixing your business loan interest rate. They may charge a higher rate if your business has a credit heavy background.
- Your credit score: When sanctioning a business loan, lenders even give attention to your personal credit score. Lenders usually require your score to be 750 and above to be eligible for loan approval. Your personal credit history and repayment habits play a crucial role in deciding your business loan interest rate.
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If you are looking to avail a business loan for your company expansion ensure to follow certain tips, which can assist you to qualify for lower interest rate on business loan. These tips include, maintaining a higher credit score of 750 and above, conducting a thorough market research i.e., comparing amongst lenders and selecting a shorter loan repayment tenure.