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Important Factors of Business Loan Interest Rates

Business loans are a great financial help when your business hits a rough patch or when you want to expand your business to newer territories. These loans give you easy funds for your business use and help in continued productivity and efficiency. Just like other loans, business loans too have an interest rate which is paid along with the monthly instalments. Different lenders charge a different rate of interest. Moreover, the interest rate might also vary between borrowers even if the lender is same. Do you know why?

It is because business loan interest rates are influenced by a lot of factors. Lenders weigh in these factors in all loan applications and then fix the rate. Here are the factors which affect business loan interest rates –    

  • Credit score

    Credit score is an important parameter which affects the interest rate. It represents the credibility of you and your business in repaying the loan. If the score is good, lenders are comfortable in allowing your business a loan and the interest rates are kept low. For bad credit scores, however, the interest rates are high and the loan might even be rejected. One thing to note is that the credit score of your business entity and, in many cases, yours too, is taken into consideration before the interest rate is fixed. If either of the score is bad, the interest rate would be affected.
  • Age and nature of the business

    Business vintage is also considered when fixing the interest rate. If the business is running for a longer period, it is believed to have established itself. Winding up of old businesses is not considered a possibility. In these cases, for older businesses, the business loan interest rates are kept low. Newer businesses, on the other hand, present a higher risk. They present a possibility of being wound up in case of continued losses. As such, the interest rates for new businesses are high.

    Similarly, the industry to which your business belongs to is also important. It helps the lenders understand whether your business is exposed to industrial volatilities or not. If your business operates in a volatile industry lenders would fix a higher interest rate on your business loan and vice versa.   
  • Profitability

    The profitability of your business determines the ease of loan repayment. If your business has had good profit cycles in the last few years, lenders are more favourable towards your loan application. The profit cycles ensure ease of loan repayments and lenders, therefore, lower the interest rate. However, in case your business is making sustained losses, it signals risk and the interest rates are higher.
        
  • Existing business assets

    If the business has assets to its name, the fear of loan default is minimised as the lender can sell off the assets to realise the loan. Interest rates are, therefore, kept low for such businesses.
       
  • Type of loan

    Business loans come in both variants – secured loans and unsecured loans. Needless to say, unsecured loans have a higher interest outgo than secured ones as the lender does not possess any collateral in case of loan default under unsecured loans. Thus, the type of loan you seek also affects your business loan interest rates. Try to go for secured business loans to lower the interest outgo.

When you apply for a business loan, knowledge of these factors is essential. It lets you understand the interest rate charged by the lenders and also educates you on the ways to reduce your business loan interest rates.

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Bhavna SinghalBhavna Singhal
Joined: August 2nd, 2018
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