All You Need to Know About Business Loan Interest Rate 2024

Since the start of the pandemic, most business owners have set their eyes on the monetary policies of the Reserve Bank of India (RBI). To maintain price stability and promote high economic growth, the RBI regulates the money supply in the economy through interest rate regulation. Even during this time of need, the RBI did not disappoint business owners and other borrowers and offered them some loan moratorium and restructuring options; they also kept the interest rate unchanged for a long time. The repo rate, which is the key lending rate, is kept at 4% while the reverse repo rate, or the central bank's borrowing rate, is kept at 3.35%. This was done to help financial institutions.
 
Let us take a detailed look at business loan interest rates and the factors affecting them:
 

Type of Business Loans Interest Rate in India

 

Diminishing Interest Rate 

Sometimes referred to as reducing or balance rate of interest, the diminishing interest rate is calculated each month on the outstanding loan balance. Monthly instalments include both interest and principal repayment for the outstanding loan amount. The outstanding balance decreases with each EMI payment. As a result, the interest for the following month is computed only on the outstanding business loan amount, as lowered by this month's principal payment.
 
Also Read: A Quick Guide To Finding The Right Loan For Your Business
 

Fixed Interest Rate

Also known as a flat rate of interest, a fixed interest rate is charged on the entire loan amount throughout the loan repayment period.

To calculate interest rates, one should use a business loan interest rates calculator. It allows you to calculate how much you will have to pay at the end of each month and plan your monthly budget accordingly.
 

Why Does the Loan Interest Rate Change? 

 
At times, financial institutions borrow funds from the RBI to meet the needs of their customers. In return, the RBI charges the financial institution an interest rate, known as the repo rate. If the RBI raises the repo rate, financial institutions restrict themselves from borrowing from the RBI. Therefore, to maintain the demand-supply balance, financial institutions raise interest rates on business loans and other types of loans.
Lending rates are a part of the RBI’s monetary policy and are proportional to inflation. When prices rise due to inflation, the RBI usually increases the repo rate to discourage borrowing and keep inflation in check. From the business point of view, this is done to bring down the investment and cash flow in the market, ensuring that the economy's demand and supply stay balanced.
 
Other factors influencing the business loans interest rate: 
 

Business Profile 

Do you need a business loan without security? Do you have a solid business profile? When lending business loans for small businesses, financial institutions consider business credibility, the number of years a business has been in existence, a business owner's profile, and other such factors.
 

Repayment History

Have you ever taken a business loan such as a working capital loan, an equipment loan, or any other similar loan for your business? If yes, how did your payback pattern go? Have you paid your EMIs on time? These are some of the questions your lender consider when evaluating your loan application. Staying on top of your EMIs and not defaulting on any of your prior or existing loans boost your chances of getting a low-interest business loan.
 
Also Read: Know About the Application Process of Unsecured Business Loan
 

Nature of Business

 
Do you deal in a business whose market demand is seasonal, or do you operate in a business where the working cycle fluctuates according to market conditions? 

When applying for a business loan, all of these considerations become critical. Generally, financial institutions avoid lending to businesses that are involved in high-risk activities. They may either turn down your application or charge you with a higher interest rate. 
 

Business Financial and Revenue

When lending small business loans, financial institutions check the business’s cash flow, balance sheet, and profit and loss statement. These factors help lenders in determining the viability of your business. You must also keep your sales report and sales projection handy. Sales report gives an idea of the business revenue; having strong business financials boost your chances of acquiring a low business loan interest rate in India.
 

Business Plan 

If you are a start-up or are seeking business loans for a small business, it will be good to create a solid business plan outlining your vision, objective, and future business actions.  It has a direct relation with the business loans interest rate. If the lender is satisfied with your business plan, you may get a low-interest small business loan quickly.