What Determines the Business Loan Interest Rates – Internal & External Factors

Are you planning to take a loan for business? If yes, you need to be aware of different factors that will affect the interest rates. Different lenders offer different interest rates to different types of borrowers. Read on to know more.

Factors that Affect Business Loan Interest Rates

Let us look at various internal and external factors affecting interest rates of a business loan.

Internal Factors

● Type of Business

First and foremost, lenders will consider the nature of your business along with the risk it is exposed to. They charge a higher interest rate for businesses with high risk and high volatility to protect themselves in case you default. For instance, businesses in mining, fireworks and ammunitions will face a higher interest rate.

● Age of Business

Lenders also consider the duration of the business. They prefer lending to businesses that have proven themselves over time. This is because well-established businesses will have experience in dealing with credit and handling financial matters with maturity. This gives lenders a sense of security due to which they will offer lower interest rates to such businesses.

New businesses and startups are offered high-interest rates in most cases.

● Type of Loan & Collateral

Secured Loan – They have lower interest rates since you have to pledge some collateral, which is lent against the loan. If you default, the lenders will have the right to seize the collateral.

Unsecured Loan – You don’t have to have any collateral, which means lenders will charge higher business loan interest rates to protect themselves.

● Annual Turnover

If your annual turnover is high, lenders will charge a lower interest rate. Annual turnover indicates your business’s profitability. Lenders use that metric to estimate how well equipped you are to repay the loan.

Higher turnover means you will be in a better position to repay, thus lenders will be at a lower risk. Conversely, a history of bad turnover will affect the chances of getting a low-interest rate.

External Factors

● Inflation

Inflation in the economy plays a major role in determining the interest rates of business loan. If inflation goes higher, the interest rates will also go up. This may affect your ability to repay the loan.

● Monetary Policy of the Country

The Reserve Bank of India decides the monetary policy in the country. It uses numerous tools to adjust the amount of money supply in the market. Each of them will have a bearing on the amount of money that will be circulation. If the liquidity is acceptable, the interest rates on business loans will be lower. If the liquidity is not adequate, it will lead to higher interest rates.

● Economic Players in the Market

Banks, stock markets, financial institutions, borrowers, companies, and lenders in unorganized markets are some of the players in the economy. If any one of these sectors experiences a major financial issue, its effect can be felt across all the sectors. This can affect interest rates.

Make sure you consider all the factors before approaching for a business loan. A personal loan for business can also be a good option to consider.

Author bio:

Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India's first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics, so email him your questions at shiv@moneytap.com.