Business loans can help the borrower upgrade his new business or they can help the borrower resuscitate his dying business. One, thing to keep in mind, before opting for a business loan, is the business loans interest rate payable on the capital borrowed. An interest rate is an extra charge payable on the total capital borrowed from the loan institute. One should always look for a business loan with a low rate of interest and high benefits. It is always recommended to plan the repayment strategy using EMI calculators online.
What are interest rates and why do banks implement this rate?
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Interest rates are a percentage of the principal lent by the lender to the borrower. Banks also pay a percentage of interest on the deposit saved by a user. Interests are a form of income for anyone who receives it. Banks issue interest rates for the same reason, to earn income over some time. As the period of loan repayments extends, the interest rates also increase for obvious reasons.
Types of business loan interest rate
Business loan providers calculate business loan interest rate depending on different types of rates and their policies. There are generally two primary types of loan rates. They are briefly discussed below:
Fixed-rate
Fixed-rate of interest also known as simple interest is a stable rate of interest that does not alter over the repayment period. People expecting the current market values to go up before the end of the repayment period, usually opt for this type of loan. Although, if the borrower’s forecast turns out wrong and the market values fall through the roof, then they may be paying more interest and having a loss on the capital borrowed.
Variable rate
Variable rates are the exact opposite of fixed rates, as they may incline or decline over the repayment period of the loan, depending on the current market values and government provisions. Borrowers willing to take risks may opt for this interest rate. Also, in this case, if the market values suddenly go up then borrowers with variable rates will be paying more than fixed-rate holders.
External factors influencing business loan rates
As we said above, the business loan interest rate depends on many factors including the repayment period. Now let’s move on below to see some factors influencing business loan rates:
Inflation rate
Inflation is a growing problem in our country. It also causes fluctuation in loan rates. Every time the inflation rate increases so do the loan rates. The borrower should always keep updated with the latest national news and follow recent economic trends, to forecast the upcoming inflation. That way the borrower may change his collaterals or opt for a different loan scheme with fixed rates.
Type of business
The lender verifies all the credibility of the borrower and that includes scrutinizing the type of business, the lender is applying for the loan. If the lender is applying for a great loan amount, then he must have a viable business to vouch for his repayment ability.
Government policies
The government takes different measures to tighten the money supply, and one of these measures is to increase loan rates. So that few people will choose to opt for a loan, and that way the money supply will not exceed. The Reserve bank of India increases the repo rate to tighten the money supply to the commercial banks. And banks in the same way increase their loan rates.
Credit scores
A borrower needs to maintain a good credit score of at least over 700 to ensure the lender party his repayment ability through past loan repayment strategies. Credit scores are brief numerical values. That denotes the borrower’s previous credit experiences. Good credit scores always provide low-interest rates.
Cash flow
Cash flow shows the lender all transactions made as business activities. Cash flows help the lender decide the estimated risk for the particular customer. And if the lender is assured that the borrower has the required turnovers and other incomes then an interest discount is given to the borrower. Keeping a bank statement for the past 2 years can also be used with a cash flow statement.
Conclusion
In conclusion, one should always be aware of the interest rate and how they work before applying for loan approval. Borrowers should always consider having a second plan, in case their monthly instalment ever defaults. They should have enough funds saved every month so that smooth loan repayment occurs.
