Business Loan Fees And Interest Rates

It is very important to understand the factors affecting the interest rate you can get on your loan application. As mentioned earlier, business loans are availed by small scale business owners to multinational companies. Their revenue forecast is different and so is their business loan needs. The bank has to carefully evaluate the eligibility of the entities to arrive at the appropriate interest rates.

The following criteria are most commonly evaluated while processing a business loan:

Credit score: It is important for the banks to be assured about the repayment capability of the borrower. A high credit score assures that to the bank. The bank will check the company’s credit score to determine credibility. They look into the repayment history on other loans and liabilities you have. A good credit history will help in getting the loan easily with better terms and interest rates.

Business stability: The financial stability of the business is important to sanction the loan. Banks will look into the sales and profit aspects of the business. This can be inferred from your business history and the tenure of your company. Usually, banks prefer companies which have a tenure of at least 3 years to sanction the loan. Older the business, greater the chance of getting a business loan with favourable interest rate and other conditions.

Business Profitability & Continuity: Another important criteria is that your business should be making considerable profit. Banks wouldn’t want to lend money to a business that is not doing very well. Bank might ask you for the profit & loss statement of the past 2 years. Your organization’s profitability and revenue play an important role in determining if a company can be given a loan or not.

Current relationship with the Bank: Your current standing with the bank is also important. The bank will look into all your relationships with the bank. The cash flow and payments on your account. It will also see your repayment history on any existing loans you have with the bank.

Collateral: Though many government schemes give collateral free business loans, the borrower can pledge some kind of collateral, that he is comfortable with, to get better loan terms and interest rates. The government guidelines state that collateral is not mandatory, the applicant is free to provide some. Pledging a collateral acts as additional security on the loan, allowing for higher loan amounts and lesser interest rates.

What are the types of Business Loans available in the market?

Business Loans are mainly of two types – 

• Secured Business Loans
• Unsecured Business Loans

Secured loans for business are those which are given against a personal guarantee or some kind of collateral pledged by the borrower. Secured loans are usually disbursed as Term Loans, Equipment Loans, Vehicle Loans or Loans against Property.

Unsecured loans, on the other hand, are issued on the credibility of the business itself, instead of collateral or guarantee. These loans are usually taken for a short time period of 5-15 days. These are mostly non-fund based credit facilities like OD, Letter of Credit, Bank guarantees, and so on.

What are the types of Business Loan Interest Rates?

Business Loan Interest Rates are of two types: 

• Diminishing Rate 
• Flat Rate

A Diminishing Rate or a Reducing Balance Rate is levied every month on the balance loan amount. In this method, the amount on which the interest is calculated reduces every month. The below formula is used to calculate the interest:

Interest payable per EMI = Interest Rate per EMI X Remaining loan amount

This reduces the burden on the borrower with regards to the interest compound of the EMI. This also allows for faster repayment of the loan.

In a Flat Rate Interest method, the interest component of the EMI is constant until the end of the repayment tenure. It is calculated on the total loan amount and the total repayment tenure. The EMI is not reduced in this case and the borrower repays till the end of the tenure. The Flat Rate interest rate is calculated by this formula:

Interest Payable per EMI = (Original loan amount * Number of Years * Interest Rate per annum)/Number of Payment

How can I get better interest rates for my Business Loan?

It is all in the Business Plan: While submitting your loan application, make sure that you have a solid business plan. The plan should elaborate on the financial outcome for the foreseeable future. It should show stability and growth while underlining the security and risk factors of the business to the lender. A well-executed business plan will elucidate confidence to the lender on you to sanction a business loan with lower interest rate.

Be Meticulous with your Documentation: Business Loan applications require a number of supporting documents pertaining to your current establishment and the planned project. Make sure that you have all the latest documents and proofs to support your business plan. Avoid any misleading or ambiguous documentation or information. Proper documentation assures the lender of your genuineness.

Go for a comfortable repayment tenure: At the onset, you might feel that you need to repay the loan at the earliest to reduce the interest burden. You might choose a lower repayment tenure to do that. But later on, if you come across any kind of financial pressure, it could affect your loan repayments adversely. It is wise to choose a comfortable repayment tenure that will allow you to manage your monthly cash flow seamlessly. You can always pre-close or fore-close the loan in case of better profits.

Research on Special Business Loans: Banks keep offering special discounts and offers on Business Loans from time to time. Keep out an eye for these special offers to make the best of them. They might also introduce some limited time schemes for specific business owners with attractive terms and conditions. It is good to be updated with all the latest offers and discounts so that you can get a good loan for your business.

Government offers on Business Loans: The Government of India has numerous schemes to help the MSME Sector. They have the CGTMSE credit scheme, The MUDRA Yojana, The PMMY Scheme and many more for the benefit of entrepreneurs in this country. Banks are appointed as the primary point of contacts for these schemes. Read about these schemes carefully and choose the best one to suit your needs. The government has websites and other resources to help you with these schemes. Make use of them to get the best out of these Governments schemes.

Documents required to apply for a Business Loan

Business Loans have different document requirements based on the type of business involved. The Bank will give a prescribed list of documents to be submitted. However, the common set of documents required for most business loans is given below:

• PAN card of a company or an individual
• Identity proof like Aadhaar Card, Voters Identity Card, Passport and Driving License
• Address proof like Aadhaar Card, Voters Identity Card, Passport and Driving License
• Bank Account details along with Bank Statements for the last 6 months
• The Balance Sheet, the P&L i.e. the Profit and Loss statement for past 2 years along with latest ITR filings which is duly audited by a certified Chartered Accountant
• A proof of continued business operations like Income Tax Return of last 3 years, a valid Trade License, Sales Tax Certificate, Shops and Establishments Act Certification, etc.
• Other obligatory documents like the declaration of sole proprietary, a certified copy of the deed of partnership, a certified true copy of the Articles of Association and the Memorandum of Association as well as the Board Resolution in original
• Photocopies of lease deeds/title deeds of all the properties being offered as primary and collateral securities.
• Projected balance sheets for the next two years in case of working capital limits and for the period of the loan in case of term loan.
• Assets and liabilities statement of promoters and guarantors along with latest income tax returns in the prescribed format

Business Loan Interest Rates FAQs