The interest on a business loan in India typically starts at 14.99% per annum, with various lenders offering competitive rates for affordable financing. The lender will consider other factors, such as the applicant’s creditworthiness and business plan, credit score, and loan amount required to determine the final rate levy for respective borrowers. Tweaking the factors directly related to individuals can thus help secure the best rates on business loans in India.
How to Get a Business Loan at a Low Interest Rate?
- You can improve your credit score and keep it at 750 of 900.
- Income stability and good loan repayment history are essential to ensure financial standing.
- You can improve your creditworthiness by timely bills, EMIs, credit card payments, and any other monthly payment.
- A decent source of income is essential too.
- Long-term loans for businesses with timely repayments are better than short-term ones for credit history build-up.
- Open an account, build a relationship, and establish trust with the bank over time before availing of a new advance for better rates.
- Keep your old credit cards and bank accounts open and functional.
- Provide valuable collateral, or security, if necessary, for a secured business loan.
Credit Score: The Critical Aspect of Getting a Loan at a Low Rate of Interest
A credit score is a numerical value generated by credit bureaus representing one’s creditworthiness and helps determine the probability of loan approval and denial. Financial institutions can approve or deny credit card or loan applications based on credit score. A credit score above 750 improved chances for loans at relatively low interest rates as well as fast and hassle-free approvals. A few lenders will accept credit scores of 650 or higher if all other criteria are met.
Individuals, entrepreneurs, small business owners without credit history, or those brand new to credit can build and maintain credit scores by taking out any loan or credit card. As interest rates of business loans vary from one lender to the next, so do minimum credit scores required by banks/NBFCs in order to get loan approval. It will generally vary depending on the applicant’s business profile, type of loan, and other relevant factors.
Factors Affecting Business Loan Interest Rates
- Attributes of a business: The lender usually categorizes the loan as a priority sector or non-priority sector. Loans in the latter category are more expensive than priority sector loans. Your business loan interest rate will be determined by the nature and size of your business.
- Age of business: The longer your business exists, the better. It doesn’t matter what type of business you are in; two years minimum operation is mandatory. If you have more years of business experience, your chances of getting loans with lower interest rates increase.
- Indemnity: Indemnity/collateral refers to the security pledged to the lender to obtain a loan. The collateral’s value will determine the extent of the benefits. Banks can secure highly valuable collateral such as real estate, equipment, and machinery. The bank will examine the collateral and may offer a higher loan amount based on the risk.
- Type of loan provider: Interest rates for business loans can vary among lenders. Such rate levy can be based on the market presence and reputation of the lender in the financing sphere.
- Turnover: The monthly turnover of your company determines if you are making a profit or losing money. It is still a major factor in determining eligibility for a loan. Maintaining consistency in turnover is vital as it will help your lender determine favourable loan amounts and repayment terms.
Interest Rates and Types:
- Fixed-rate of interest: The fixed interest rate is calculated based on the total loan amount for the duration of the tenure. The interest rate is charged even though the monthly EMIs would reduce the principal amount.
- Reducing rate of interest: On the remaining loan amount, a reduction or diminishing balance is calculated every month. The EMI includes principal repayment and interest. The loan’s outstanding amount will decrease after each EMI repayment. Thus, the interest rate in the next month would only be applicable to the remaining amount.
Imagine an organization borrowing Rs.10,000,00 over three years at 10% interest per annum. The following chart can help you understand the basic difference between a fixed rate of interest and a reducing rate of interest.
| Fixed Rate of Interest | Reducing Rate of Interest | |
| Amount | Rs.10,000,00 | Rs.10,000,00 |
| EMI | Rs.36,111 | Rs.32,267 |
| Interest | Rs.3,000,00 | Rs.1,61,619 |
| Total Final Amount | Rs.13,000,00 | Rs. 11,616,19 |
You can see in the table that the reducing interest rate is better for the borrower.
Required Documents for a Low Interest Business Loan
- Address proof (Aadhar card, Voter ID, Bank Statements, Proof of registration, etc.)
- Identity Proof (Passports, Aadhar card Driving Licence, PAN, etc.)
- PAN, GST Registration, and Trade License.
- Copies of Income Tax Returns and PAN Card for the last 24 months.
- Previous 12 Months Bank Statement
The rate of interest on a business loan in India offered by reputed lenders like NBFCs may differ. It is important to read all terms and conditions thoroughly before applying for a loan. Compare every available option and proceed as per instructions.
