Business Loan Interest Rates updated Jun, 2023

It doesn’t matter how small or big the business, to carry out all functions funding is essential. Funding is not just required in the form of one time investment-capital but also as a working capital at regular intervals. Not everyone will have money at all times to pool into business as and when required. Also, some days there will a need for a lot of money, while others days, there is absolutely no need at all. All of us will be happy to take a business loan that has less interest rate. Here are some information about business loan and its interest.

Business loan interest rates are mainly of two types which are reducing or diminishing Rate of Interest and Flat Rate of Interest. These are explained in detail here:

a. Reducing or Diminishing Rate of Interest

Reducing or Diminishing balance rate means the interest rate which is calculated each month on the remaining loan amount. In this technique, the EMI comprises interest that is payable for outstanding amount of loan for each month along with the principal of repayment. After each EMI payments, outstanding amount of loan gets reduced. Thus, the rate of interest for the following month is the calculation of interest only on outstanding amount of loan. Formula for calculating this reducing-balance interest is Interest Payable per Payment = Interest Rate per Payment * Remaining Loan Amount.

For example, if a person has taken a loan for amount Rs 1, 00,000 with reducing rate of interest method of 10% p.a. for about tenure of 5 years, then the EMI amount would decrease with every month’s repayment. The first year the borrower will have to pay Rs 10,000 as interest; but in the second year it will reduce to Rs. 8,000 on the reduced principal amount of Rs. 80,000 and so on, until the final year, which is when the borrower will have to just pay Rs. 2,000 as interest. This is a total opposite of fixed interest payment method.

b. Flat Rate of Interest

Flat interest rate means the interest rate which is calculated on full loan amount during the course of its tenure without considering that monthly EMIs would gradually decrease the principal amount and thus the interest rate. Therefore, the Effective Interest-Rate is prominently higher than nominal Flat-Rate. The formula for calculating fixed rate of interest is Interest Payable per Payment = (Original Loan Amount * No. of Years * Interest Rate p.a.) / Number of Payments.

For example, if a borrowers has taken a loan for amount Rs 1, 00,000 with the option of flat rate of interest of about 10% p.a. for a tenure of 5 years, then he would have to pay Rs 20,000 which is the principal repayment for the amount of (1, 00,000 / 5) + Rs 10,000 -interest at 10% of this 1, 00,000is equal to a total of Rs 30,000 year after year or about Rs 2,500 each month. Over the tenure of the loan, the borrower will end up paying Rs. 1, 50,000 that is (2,500 * 12* 5).

In addition, all interest rates charged by banks/NBFC’s which Finance Buddha works with follow a written down value principle. For more details on the amortization schedule please click here.

The rate of interest in business loans broadly range between 15%-24% p.a. The final rate of interest is dependent on the profile of the borrower, credit score, financials, existing leverage, business stability, industry outlook and various other risk assessment parameters.

There are main factors that determine the business loan interest rate. However, the top 4 among the list are mentioned below:

• Credit Score: All applicants who have good credit score can walk into any bank to get a business loan. The better you score is you can avail more benefits and the interest rate will also depend on the same.
• Time in Business: Irrespective of what type of business it is, the minimum operation period is of two years or more. The longer a business has been in existence the more is the probability of getting a loan.
• Monthly Revenue: Return or income is always a key factor for any type of loan. For business loan the consistency is a main factor. All business has different revenue at different period, but having a consistency is crucial. The average daily balance is analyzed by banks to determine the loan amount and repayment capability.
• Collateral: It is the security that is pledged with a bank to avail loan, the more the collateral value is, the benefits are more. This gives a security for the banks to offer bigger amount as the risk is low. The different types of collaterals are deposits, home equity, investment real estate and equipment.

• Per Month's EMI: For this factor, not just present status is considered, the past records of financial stability holds lot of value in deciding the capacity to pay per month EMI. It is a key to success in all fields if you have good financial records, this can decide the interest rate percentage, loan amount and tenure when applying for new loan. Make sure you are paying your EMI with the excess fund that is not affecting your basic needs requirements. It is essential to make sure this payment is made without any default as it will affect the CIBIL score.
• Processing Fee: It is a onetime payment made to the bank to get them to process the loan amount. It’s the additional cost incurred for the service charges. This is not refundable and no interest will be provided on the same. No matter what loan you are looking for, this charge is unavoidable and is expected to be paid at the initial stages.
• Prepayment: If ever there of a chance to pre close the loan amount before its tenure, it can be done so with an additional prepayment charges. This is calculated on the outstanding balance by the bank to check the service charges and other factor.
  Make use of the business loan option to start your journey towards your dream. Money should never be a show-stopper to start any business in this era when there are ample options available.

Before making the final decision on your business loan provider, make sure the various factors are compared with other banks and NBFCs. The factors that should be considered are interest rate, processing fee and other charges, EMI, which type of interest rate method is used, what are eligibility criteria, is there a need for collateral or not. How reliable the bank is, what minimum requirement criteria are and so on.