Factors That Affect Commercial Loan Interest Rate

Commercial loans are secured or unsecured advances to a business. These funds can be utilized by the business for various reasons including purchase of machinery, buying inventory or scaling of operations. Although the interest rates vary from case to case, depending on whether the lender is offering fixed or floating rates, the rate of interest is higher for commercial loans as compared to personal loans. This is because, there is a higher degree of risk involved in lending to businesses. The rate of interest differs not just from one lender to another but also from borrower to borrower. That’s because there are different factors affecting commercial loan interest rates -

Credit score – Credit score is an indicator of how consistent the borrower has been with repayment of his debts in the past. Therefore, higher the credit score, the stronger your profile and vice versa. Generally a credit score above 650 or 700 is considered good.

Business experience – Lenders prefer lending to businesses that have a decent record of profits and financial statements. Even though there are financial institutions that lend to start-ups, the interest rate in such case is usually higher because of the risk involved. Therefore, if your business has been around for a while and has strong financial record, you can easily get a good deal.

Type of business - It is not just the years of experience but the nature of business also plays an important role. If your line of business is a lucrative one, you stand a better chance of getting good rates as compared to other businesses that are more risky like agriculture, gambling, wholesale, alcohol etc.

Business plan – If your business is relatively new, the financial institution might ask for a detailed business plan, explaining how you propose to utilize the funds, the expected returns etc. The plan should be detailed and comprehensive enough to convince the lender. If they are not convinced, the lender may not agree to lend, and in some cases, if they do agree they might charge a higher rate of interest.

Profits and revenue – The lender might want to check your business’s financial statements to check how your business is doing financially. They also use this knowledge to judge whether you will be able to repay the loan in the given time. They will want to check the cash flow, revenue, profits - quarterly and annually. If the financials are not very impressive, the lenders might charge a higher rate of interest.

Collateral – If you want a commercial loan with attractive rates, another option is to go for a secured loan against collateral. The collateral can be anything from your business venture to property or any other asset. This way you can bring down your interest rates because the risk to the lender is reduced significantly.

Finally, remember that no two lenders are the same. The eligibility criteria, documentation requirement etc. vary from lender to lender. Therefore, it is important to get the offer from multiple lenders and then compare. This will help you get the best deal as per your eligibility and requirement.