Calculation of Business Loan Interest Rate
Lending institutions borrow business loans upon calculating the total sum borrowed, rate of interest, and tenure. This amount is paid as easy monthly installments (EMIs). Here’s an example to calculate the EMI:
Say you availed a business loan of INR 10 lakh as working capital at an annual interest rate of 7.2% for a tenure of 10 years, then the EMI you will be paying every month is calculated using the following formula:
P x R x (1+R)^N / [(1+R)^N-1]
P: Principal loan amount = INR 10,000,00
N: Loan tenure in months = 120 months
R: Interest rate per month [7.2/12/100] = 0.006
EMI= INR 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = INR 11,714.
Therefore, you would pay the EMI of INR 11,714 every month for ten years.
1.Type of Business Loans
There are various types of business loans offered by lending institutions in India. Here are the popular ones:
Unsecured Business Term Loan: Lending institutions offer business term loans, a lump sum of money paid back as EMI with added interest for a certain period.
Cash Credit: This type of loan is disbursed to businesses for a short term, usually up to 12 months. It is popular among companies as the interest is paid only on the amount withdrawn, not the total sanctioned amount.
Business Overdrafts: Banks provide a business with an overdraft facility and set a maximum borrowing limit that can be withdrawn at any time. The difference is that there are no fixed repayment patterns, provided the interest is paid periodically.
Business Loan Against Property: It is a type of secured loan that businesses can borrow from lending institutions, keeping their business assets or property as collateral.
MSME Gold Loan: Similar to loans against property, businesses can obtain gold loans (usually up to 75% LTV) against the value of the yellow metal.
Eligibility Criteria For Business Loan
Who can apply: All micro, small, and medium enterprises (MSMEs) and business units, companies, trusts and societies.
2.Business operation tenure: Minimum three years.
Business turnover: Minimum 2.5 lakh onwards (depending on the bank’spolicy).
Income Tax: The business should have a certificate of the latest income tax return (ITR) certified by CA audited. Computation of business income, balance sheet containing account on profit and loss for at least two years.
Borrower’s age criteria: 21 to 60 or 65 years at loan maturity.
Business turnover: Minimum 2.5 lakh onwards (depending on the bank’spolicy).
Income Tax: The business should have a certificate of the latest income tax return (ITR) certified by CA audited. Computation of business income, balance sheet containing account on profit and loss for at least two years.
Borrower’s age criteria: 21 to 60 or 65 years at loan maturity.
3.Documents Required to Apply for Business Loan
Factors that Affect Business Loan Interest Rates
Several factors can affect business loan interest rates, and the popular ones include:
Commercial Credit Score (CCR): Lending institutions mandatorily run commercial credit scores when initiating the process of availing business loans. This is done to assess the business’s financial standing. A CCR ranges from 1 to 10; a score near one is considered excellent. A company with a CCR score close to 10 may result in a rigorous eligibility process, and the interest rate on such a business loan is usually higher.
Credit Score: An individual’s credit score plays a vital role in availing of a low credit score. Banks consider a credit score above 750 as creditworthiness. A low credit score usually means a rigorous eligibility process and higher interest rate on loans.
Secured and Unsecured Business Loan: The interest rate on secured business loans is usually lower because the value of the asset pledged against the loan as collateral.
Loan amount and tenure: Generally, if your business requires a considerable loan with longer durations, the interest rate is high on such a loan. Also, longer loan duration typically attracts a higher interest rate.
Fixed or Floating Rate of Interest: In a fixed interest rate, businesses are charged the same interest rate throughout the loan’s tenure, regardless of market conditions. On the other hand, the floating rate of interest tends to fluctuate with changing market conditions led by change in the Reserve Bank of India’s (RBI) change in repo rates.
Industry and Market Conditions: Some lenders may also assess the current scenario of the sector your business operates in to determine the risk of the loan as well as interest rates.
These are just a few examples of factors that affect business loan interest rates. Lenders thoroughly evaluate your business’s overall financial standing, relationship with the bank, history of business operation, and economic track record while allocating interest rates on business loans.
Tips to Avail Business Loan at Low Interest Rates
A key to availing of a low-interest rate on business loans is keeping your financial records up to date so that banks can assess whether your company is in profit or running at a loss. For example, a loan can be taken either to expand your business or to recover from the loss, to cite an example.
Nonetheless, considering your business relationship with the bank, history of business operation, records of paying past loans may play a vital role in availing of a low interest on business loans.
4.Some of the tips to consider are as follows:
Improve your personal credit score ratings.
Pay your current due regularly, or don’t default on your EMI payments.
Design a good business plan.
Evaluate carefully the type of business loan (like mentioned above)
Improve your business finances.
Show prospects of how a business loan can help your finances
Offer collateral if required.
Build a good relationship with the lender.
Key Features Of Business Loan
Term loans: These are short-term loans offered to businesses to purchase assets such as land, buildings, plants, and machinery equipment. Term loans for business have a maximum repayment tenure of up to five years, and EMI is paid with or without a moratorium period.
Project financing: These types of business loans are given to mid-to-large-sized businesses to acquire large assets. The repayment tenure is more than five years.
Balloon loans: Banks offer businesses the ability to pay the loan’s interest during the term year, and the principal amount is paid in a lump sum at the end of the term.
Working capital loans are short-term loans offer businesses the ability to pay the loan’s interest during the term year, and the principal amount is paid in a lump sum at the end of the term.
Working capital loans are short-term loans offered to businesses to help run their operations, with repayment tenure of minimum one to three years.
Loan against property: As the name suggests, such loans are given against property (self or business).
Loan against securities: A borrower can get an attractive ROI if business loan is applied through existing securities such as fixed deposits, mutual funds, stocks, bonds, and insurance policy.
Government schemes: Government-funded schemes such as PM Mudra Yojna offer eligible businesses loans up to INR 10 lakh.
Tax benefit: Exemption on business loan interest paid from business profits is deductible as per the Income Tax Act, 1961.
