business loan is a life saver for all types of businesses: start-ups, SME, or MNC’s. A business loan helps you manage inventory, cash flow, and payment cycles.
Business loan interest rates depend on the amount of loan and the loan’s tenure. There are two types of interest rate models: diminishing and a flat rate of interests.
Diminishing rate of interest
The principal amount reduces as the borrower starts paying the installments of the loan. Therefore, it is only fair that the interest is applied only to the remaining principal amount and not the original borrowed amount. This technique of calculating interest is called diminishing rate of interest.
A flat rate of interest
Contrary to the diminishing rate of interest, a flat rate of interest is the technique of calculating the rate of interest on the initial loan amount. It does not consider the reduced value of the principal after the payment of one or more installments.
As seen above, it is very easy to understand why a diminishing rate of interest is more preferable.
Let us consider an example.
Suppose an organization borrows Rs. 1000000 for a tenure of three years. The interest rate on the loan is 10%.
The below table displays how both the interests will be calculated.
| Flat interest rate | Diminishing interest rate | |
|---|---|---|
| Amount | 1000000 | 1000000 |
| Monthly instalment | 36111 | 32267 |
| Interest | 300000 | 161619 |
| Total amount payable | 1300000 | 1161619 |
From the table you can see that the diminishing interest rate is more beneficial to the borrower. However, in reality, the rate of interest on a diminishing rate model is set higher than a flat interest rate.
In addition to interest, lenders levy other charges like stamp duty, processing fee, bank guarantee, foreclosure charges, other statutory charges and letter of credit charges.
Therefore, ensure that you educate yourself about interest rates, payment options, tenure, and applicable charges before applying for a loan.
Lendingkart and business loan interest rate model
Lendingkart provides SME-business loans throughout India. It provides a flexible rate of interest and a document free process.
The benefits of taking a business loan from Lendingkart
There are several benefits offered by Lendingkart in comparison to banks providing similar loans.
Business Loan Interest Rate in India 2023:
| Rate of interest | Starting from 1.25% per month |
|---|---|
| Tenure of the loan | Maximum up to 36 months |
| Collateral | NA |
| Amount of loan | Rs. 50,000 to 1 Crore |
| Pre-Closure fees | NA |
| Processing charges | 2 to 5% of the loan amount |
| Time to sanction a loan | Within 3 working days |
| Eligibility | >90000 turnover for a quarter |
*based on your business’s health and credit score
**Pre-closures are only allowed after the first EMI has been paid in full
We have a proprietary method of calculating interest rates which evaluates your loan application using advanced analytics. By enabling technical inputs and outputs we have made the process of calculating interest rates faster and more accurate. The attractive business loan interest rates are calculated by factoring in several things listed below and are different for every partner SME.
- Loan Amount:Â The amount that you apply for, pending approval, counts towards deciding the interest rate. Generally, the higher the amount of loan, higher the possibility of a lesser interest rate from Lendingkart.
- CIBIL Ranking: If your CIBIL score and history are good, the interest rate we charge will be lower and vice versa.
- Balance Sheet:Â If you are earning good margins, we will take that in consideration while deciding interest rates on your loan.
- Age of Business: For long running enterprises, we offer special discounted SME loan rates
Business Friendly Loan Approval and Pre-closure Charges
We do not believe in charging extraneous charges and fees from our customers. That’s why we have one of the friendliest pre-closure policies – there are no pre-closure charges. After paying the first EMI, you can prepay the full loan amount, anytime. Added with the benefit of attractive interest rates, it is a great way to finance any short term business requirement.
Also, we only charge 2% of the loan amount plus service tax as processing fee. It’s a one-time fee which you don’t have to pay if you choose to reapply for the same loan amount upon closing.
Minimum documentation and turnaround time
When applying for a business loan with Lendingkart, you have to submit only a handful of documents. And we process every loan application within 3 days of document verification.
Documents required by us are:
- Address proof (Aadhar Card, Voter ID, Bank Statement, Proof of registration, etc.)
- Identity Proof (Passport, Aadhar Card, Driving Licence, PAN, etc.)
- Proof of Business (PAN, GST Registration, Trade License, Registration Certificate issued by RBI or SEBI).
- Copy of PAN card and Income Tax Returns for last 24 months.
- Bank Statement of last 12 months.
Also Read: What Is the Average Interest Rate on a Business Loan?
Easily Calculate Your EMIs:
We offer a business loan EMI calculator which you can use to get an idea of EMI amounts you will be paying. The EMI is calculated based on the Lendingkart interest rate offered to you, the loan amount and tenure. For example, the EMI payable for a one lakh rupee loan, taken for 12-months at 18% interest per annum, will be Rs. 9,168. In similar scenario, if the interest rate is 27% p.a., then the EMI will be Rs. 9,602.
Needless to say, the higher the amount of your loan, the higher the amount of your EMI. The EMI calculator also helps you in budgeting and adjusting your finances to meet your EMI payment schedules.
Factors that affect Business Loan Interest Rates
Business loan interest rates are a pivotal factor affecting the total cost of your loan or financing. Business loan low interest rate equate to reduced payments and increased savings, making them an ideal target. However, several factors influence the actual interest rates you’ll secure for your business, including your financial standing, credit history, industry, and more. Here’s a breakdown of these influential factors:
- Healthy Cash Flow:Â Cash flow, representing the money moving in and out of your business, is crucial for lenders. It showcases income, expenses, and potential profitability. Robust cash flow indicates lower risk, leading to lower interest rates.
- Business Type and Industry: Your business’s type and industry signal growth potential. Lenders prefer businesses in expanding or stable sectors, offering lower interest rates. Conversely, seasonal or newer businesses in declining industries may face higher rates.
- Creditworthiness:Â Your credit score serves as an initial assessment of your borrowing risk. Traditional banks often rely on credit scores for loan approval. A strong credit score results in lower rates and favourable terms, translating into long-term savings. Weaker credit can lead to higher rates and less favourable conditions.
- Collateral:Â Some lenders, notably banks, may require collateral for financing, termed secured financing. Collateral can secure lower interest rates, but not all businesses possess sizable assets for collateral, especially smaller or newer enterprises.
- Existing Loans:Â Lenders typically hesitate to work with businesses juggling multiple outstanding loans. This raises concerns about cash flow and repayment capacity, potentially resulting in higher interest rates or application rejection.
Tips To Get a Low-Interest Rate Business Loan
- Boost Your Credit Score: Aim for a credit score of 700 or higher for lower interest rates.
- Maintain EMI Consistency: Avoid loan payment defaults to gain favour with banks and secure lower rates.
- Create a Strong Business Plan: Impress lenders with a clear plan outlining your company’s goals and strategies.
- Strengthen Financials: Improve financial statements by showcasing your business’s stability and growth potential.
- Explore Refinancing: Consider transferring your loan to lenders offering better rates or terms.
- Offer Collateral: Pledge assets to lower lending risk and potentially reduce interest rates.
- Build Lender Relationships: Maintain a positive history with your bank by timely payments and transparency for better loan terms.
Read Also: How to Get a Business Loan
Conclusion
In conclusion, the MSME sector in India encompasses a diverse range of businesses, each contributing significantly to economic growth. Access to competitive business loan rates is vital for the sustained success of these enterprises. Understanding the factors that influence business loan interest rates, such as creditworthiness and industry stability, is crucial for MSMEs seeking affordable financing. Indian banks play a pivotal role in providing these loans, making it essential for businesses to optimise their financial standing and leverage schemes tailored to the MSME sector to access favourable business bank loan interest rates and drive economic prosperity.
