How is Business Loan Interest Rate Calculated in India?
In today’s competitive business environment, access to timely financing is crucial for growth, expansion, or managing operational expenses. Business loans have become a vital tool for entrepreneurs and business owners to meet their financial needs. However, one of the most critical factors to consider when applying for a business loan is the interest rate. Understanding how business loan interest rates are calculated can help you make informed decisions and optimize your borrowing costs. In this blog, we will explore how business loan interest rates are calculated in India and how you can find the best low-interest business loans.
Business Loan Interest Rates Offered by Our Partners
| Lenders | ROI |
|---|---|
| Lending Kart | 23% To 30% |
| Flexi Loans | 24% To 28% |
| Piramal | 17% To 25% |
| Axis Finance | 18% To 24% |
Factors Affecting Business Loan Interest Rate
Several factors influence the interest rate on business loans in India. Lenders evaluate these factors to determine the risk associated with lending to your business. Here are some key factors:
Credit Score : Just like personal loans, your credit score plays a significant role in determining the interest rate. A high credit score (750 or above) indicates a strong credit history and repayment capability, which can help you secure a lower interest rate.
Business Vintage and Stability : Lenders prefer businesses with a stable track record. If your business has been operational for several years and has consistent revenue, you are more likely to qualify for a lower interest rate.
Annual Turnover and Profitability : The financial health of your business, including annual turnover and profitability, is a critical factor. Higher turnover and profitability can result in better loan terms and lower interest rates..
Loan Amount and Tenure : The loan amount and repayment tenure also impact the interest rate. Shorter tenures typically come with lower interest rates compared to longer tenures.
Type of Business : The industry your business operates in can also influence the interest rate. Some industries are considered riskier than others, which may result in higher interest rates.
Market Conditions : The Reserve Bank of India (RBI) sets the repo rate, which directly affects the interest rates offered by banks and NBFCs. A lower repo rate can lead to lower business loan interest rates.
Understanding Effective Interest Rate
When applying for a business loan, lenders may advertise attractive interest rates like “starting from 10%”. However, the effective interest rate (EIR) might be higher due to additional charges such as:
Processing fees (usually 1-3% of loan amount)
Documentation charges
Insurance premiums
Late payment penalties
Pre-payment charges
Always consider the EIR, as it reflects the true cost of borrowing.
How Business Loan Interest Rate is Calculated?
Banks and NBFCs use different methods to calculate interest rates on business loans. The two most common methods are:
1. Flat Interest Rate Method
In this method, the interest is calculated on the total loan amount for the entire tenure. Here’s the formula:
Interest = (Loan Amount × Interest Rate × Tenure in Years) / 100Example:
Loan Amount: Rs. 10,00,000
Interest Rate: 12% per annum
Tenure: 5 years
Interest = (10,00,000 × 12 × 5) / 100 = Rs. 6,00,000
Total repayment = Rs. 16,00,000
This method often results in a higher interest burden for borrowers.
2. Reducing Balance Interest Rate Method
In this method, the interest is calculated on the outstanding loan balance after each EMI payment. The formula used is:
EMI = [P x R x (1+R)^N]/[(1+R)N−1], [(1+R)N −1]- P = Principal loan amount
- R = Monthly interest rate (annual rate divided by 12)
- N = Loan tenure in months
This method is more borrower-friendly as the interest outgo reduces over time.
How to Compare Business Loan Rates?
With numerous lenders offering business loans, it’s essential to compare interest rates and terms before making a decision. Here’s how you can do it:
Use online comparison tools : Platforms like BigMudra offer business loan calculators that allow you to compare interest rates, EMIs, and total repayment amounts.
Check the APR : The Annual Percentage Rate (APR) includes the interest rate and other charges, giving you a clearer picture of the total cost of the loan.
Read The Fine Print : Some lenders may offer low-interest rates but impose high processing fees or prepayment penalties. Always read the terms and conditions carefully.
Negotiate with lenders : If your business has a strong financial profile, you can negotiate with lenders for a lower interest rate.
Digital Revolution in Business Loans
The rise of digital lending platforms has made it easier for businesses to access loans quickly and conveniently. Platforms like BigMudra offer:
Quick approval processes
Minimal documentation
Competitive business loan interest rates
Digital KYC
Instant disbursement
However, be cautious of predatory lending apps that offer instant loans at exorbitant interest rates.
How to Apply for a Low-Interest Business Loan?
If you’re looking to apply for a low-interest business loan, here are some tips to help you secure the best deal:
Improve your credit score : Maintain a good credit history by paying EMIs and bills on time. Avoid applying for multiple loans or credit cards in a short period.
Choose the right lender : Different lenders offer varying interest rates. Banks, NBFCs, and online lenders have their own eligibility criteria. Research and select a lender that offers the best rates for your business profile.
Opt for a Shorter Tenure : Shorter loan tenures typically come with lower interest rates. While longer tenures may reduce your EMI burden, they often result in higher interest costs.
Consider Pre-approved offers : If you have a good relationship with your bank, you may receive pre-approved business loan offers with lower interest rates.
Apply online : Many lenders offer lower interest rates for online applications. Online processes are faster, require minimal paperwork, and often come with additional discounts.
Making an Informed Decision
Before applying for a business loan:
Use online EMI calculators to understand your repayment schedule
Read all terms and conditions carefully
Check for hidden charges
Ensure you can comfortably manage the EMIs
Compare offers from multiple lenders
Conclusion
Understanding how business loan interest rates are calculated can help you make better financial decisions for your business. While instant business loans offer convenience, taking the time to compare interest rates and understand the terms can save you significant money in the long run. Whether you’re looking to expand your business, manage cash flow, or invest in new equipment, a well-informed approach to borrowing can set your business up for success.
