Evolution of non-banking finance companies (NBFCs) coupled with the launch of several schemes by the government of India, primarily the Pradhan Mantri Mudra Yojana (PMYY), availing business loans has become a lot easier. However, just like any other loan, rate of interest is one of the prime considerations among borrowers. Dependent on several factors, let’s take a close look at some of the major factors influencing the business loan interest rate in India.
Monetary policy of the RBI
The monetary policy formulated by the RBI plays a crucial role in determining interest rate. For instance, the apex bank went for a back-to-back hike of 25 bps in repo rate, which currently stands at 6.50%. Hike in repo rate means increased cost of borrowing for financial institutions, which subsequently pushes up the interest rate on all types of loans disbursed, including business loan.
On the other hand, when key policy rates such as repo rate is lowered, the benefits are passed on to borrowers in the form of a lower interest rate.
This is another critical factor affecting the business loan interest rate. A business vintage of a few years gives your prospective lender a clear understanding of your cash flow and revenue generation model. Lenders generally offer business loans at a competitive rate of interest to enterprises who have been in the market for some years as against new entities.
For instance, for availing a Bajaj Finserv Business Loan, your business must have a vintage of at least 3 years. Flexi Loan Facility is one of the unique features of this loan that allows you to borrow as and when required from the approved loan limit, with interest being charged only on the amount utilised.
Also, with pre-approved offer on business loan and other financial offerings, availing finance is quick and easy. It eliminates lengthy paperwork and saves time. To know about your pre-approved offer, simply share a few basic details.
Business credit score
The rate of interest on your business loan depends on your business credit score, which is different from a personal score. While a personal credit score reflects your creditworthiness, a business score tells your prospective lender about the ability of your business to meet its financial obligations. It helps your lender assess risks associated with lending to your business. A good business credit score helps in availing a business loan at a competitive rate of interest.
Vendor payment on time and covering all debts on time with revenues generated help you build a good business credit score. To ensure your business CIBIL score stays above 700.
Geopolitical events too play an important role in determining the interest rate of business loan. Certain events such as the recent trade war between the US and China, increase in fuel prices following the cut in supply from the Organization of the Petroleum Exporting Countries (OPEC) and Russia, etc., resulting in inflation, increase the interest rates on various loans including a business loan.
Before you apply for a business loan, compare the offerings from various lenders and choose the one that offers you the best rates. There are various aggregator sites that allow easy comparison of business loans offered by multiple lenders.