Unsecured business loans are one of the most effective ways for SMEs to support their expansion and growth. You can apply for a business loan with no security, guarantee, or insurer, use the loan amount for your business needs, and repay it over many months or years in easy EMIs. However, while seeking a business loan, one important factor to consider is the business loan interest rate. You must repay the borrowed money as well as the interest rate, therefore you must choose a business loan with the absolute lowest interest rate.
Business Loan Interest Rate: What affects it?
Because different business loan lenders may provide different interest rates, you should understand why your business loan interest rate is calculated. Only then will you be able to comprehend the ins and outs of bank loans and obtain a loan with the lowest possible interest rate. First and foremost, you must understand the elements that influence the interest rate on your business loan. The following are the most important of them:
1. CREDIT RATING
A credit rating is a three-digit figure that shows your ability to repay loans. Between 300 to 900, the better your credit score, the more likely you are to get approved for a business loan with reduced interest rates. When approving your loan application, lenders will verify your credit score. A strong credit score leaves a positive image on your creditor and portrays you as an eligible borrower. If you have a good credit score, the lender may be willing to lend you a larger loan amount at a cheaper interest rate.
2. THE NATURE OF YOUR COMPANY
The nature of your firm is another important factor that influences your interest rate. Positive and legal businesses are preferred by lenders. Lenders look at how your firm operates, how it performs. As well as its expertise and size when determining your interest rate. It ought to be a profitable firm that is already in operation. Your company must be a sole proprietorship, a private limited company, a tightly held non-listed company. Or a limited liability partnership involved in production, trading, or services to be eligible for a business loan from banks.
3. BUSINESS ANTIQUES
Lenders like firms with at least a few more years of experience in the industry, so the age of your company matters a lot. If you’ve been running your firm successfully for several years. You’ll most likely be able to acquire a business loan with a reduced interest rate. A well-known and well-established company is much less likely to lose money on a loan.
4. ANNUAL RETURN ON INVESTMENT
Your company’s annual turnover has a significant impact on the interest rate on your business loan. If you have a greater business turnover, you can get a lesser interest rate and save a lot of money on interest.
5. REVENUE AND PROFIT
Lenders will look at your business’s revenue before accepting your loan request and determining your interest rate. If you don’t have enough income, the lender may turn you down or give you a better interest rate. You’ll need the necessary documentation to see your earnings and business performance:
-A PAN Card for a business, a corporation, or a person.
-A bank statement from the previous six months
-A duplicate of the most recent IRS Form 1040.
-Income computation, verified income statement, and profit and loss account for the previous two years.
-Three-year proof of business continuity, such as your sales tax certificate, foundation, ITR, or trade license.
Aside from these, your lender will require a few additional documents, such as evidence of identity, proof of address, or proof of ownership. The business loan interest rate on your company loan will be determined by the lender based on your revenue and profit.
6. HISTORY OF PAYMENTS
Another important criterion that lenders consider when setting your interest rate is your repayment history. You are much more likely to acquire a business loan with a reduced interest rate. If you have a solid track record of repaying your expenses and EMIs. The lender may plan to pay you a higher return even if you have a great credit rating but a poor repayment capacity. As a result, always make timely payments and maintain your finances responsibly.
7. RELATIONSHIP WITH THE FINANCIAL INSTITUTION
If you’ve already taken out a loan with a bank and have an excellent working connection with them. They may agree to cut your business loan interest. Because every lender wants to keep happy customers. They will do everything they can to keep you by offering you tempting deals and reduced interest rates.