Factors That Affect Commercial Loan Interest Rate

2020-08-18T11:58:56.376Z

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.

Read This if You are Looking for a Small Business Loan

2020-06-01T12:32:24.705Z

One of the major hurdles faced by any business is capital. Be it a growth project, purchasing a new machinery or meet their working capital requirements, all businesses need funds. Be it a start-up or an established business, they need capital infusion from time to time to grow and sustain operations. Businesses have four options when it comes to raising funds:-

• Crowdsourcing
• Venture capital
• Angel Investor
• Business loans

The most viable and the reasonable option are business loans from banks and non-banking financial institutions. All major banks and financial companies provide small business loans for start-ups or other business ventures in need of funds. The eligibility criteria to obtain small business loans differ from lender to lender, banks have more stringent rules as compared to non banking financial institutions.

Small Business Loans from Banks v/s NBFC

Lending to start-ups or small business is always a risk and therefore banks tend to be lot more careful while lending to such businesses. Also these are generally unsecured loans because most small businesses do not have any assets to pledge as security. The risk to the lender is high and therefore banks prefer to cover the risk by way of stringent verification and evaluation and higher interest rates.

NBFC on the other hand, are slightly more relaxed when it comes to the lending criteria. Also most of these are small companies with most of their operations being online, have less man-hour consumption and therefore pass on the savings to the borrowers in terms of interest rates. Their interest rates are slightly better than traditional banks and again unsecured loans command a higher rate of interest as compared to secured loans. Also since most of their process is online, the application process of NBFC isn’t very extensive or time-taking. As long as you fulfil the eligibility criteria, all you need to do is fill in the form online, upload soft copies of documents and submit. The approval comes quickly and money is disbursed to your account within 24-48 hours.

Banks follow the traditional application process which requires you to visit the branch, fill out the application form and submit all documents physically in the bank and then wait. Since the process is manual, the entire process can take from over a week to a fortnight.

Another point which needs mention is that banks are weary of small businesses and therefore may not lend to businesses which have just started out or do not have profitability to show. Also in case of unsecured loans, businesses only want to lend to lend to individuals with a good credit score or history. A start-up is unlikely to have a credit record or profitability and therefore may find it difficult to obtain finance from a baks. Fin-tech companies or NBFC on the other hand, are more open to lend to businesses that have just started or those that don’t have a credit record albet at a slightly higher interest rates.

Related post -
4 Small Business Financing Options in India - (Click here)

Neha Verma

Factors That Affect Commercial Loan Interest Rate

Read This if You are Looking for a Small Business Loan