Factors That Influence Business Loan Interest Rates

by Mahindra Finance

May 13, 2024

5 mins read

One of the most important factors when applying for a business loan is the interest rate. The interest rate determines the cost of borrowing and can significantly impact your ability to repay the loan.

In this comprehensive guide, we will dive into the various factors that influence business loan interest rates. By the end of this guide, you will be equipped with the knowledge of how to get a low interest business loan.

Let us get started.

1. Credit score

Your credit score plays a significant role in determining your eligibility for a business loan and the interest rate you will be offered. Lenders assess your creditworthiness based on your credit score, which reflects your repayment history and financial stability.

2. Benchmark calculation

Lenders use benchmarks like the London Interbank Offered Rate (LIBOR) or its Indian equivalent Mumbai Interbank Offered Rate (MIBOR) to calculate business loan interest rates. These benchmarks serve as starting points for lenders when offering loans to customers.

The benchmark calculation takes into account various market factors such as inflation rates, economic indicators, and the cost of funds for the lender.

3. Loan tenure

Loan tenure refers to the period for which the loan is taken. The duration of the loan affects the interest rate offered. Generally, long-term loans with extended repayment periods come with higher interest rates compared to short-term loans.

4. Type of business loan

The type of business loan you choose can also influence the interest rate offered by lenders. Secured loans that require collateral generally come with lower interest rates compared to unsecured loans that do not require collateral.

5. Type of business

The nature of your business can impact the interest rate offered by lenders. Lenders assess the risk involved in lending money to a particular type of business.

For example, manufacturing businesses that have tangible assets like machinery and inventory, lenders consider them less risky.

In contrast, service-based businesses such as consulting firms or marketing agencies may not have substantial tangible assets to offer as collateral.

6. Business financials

Lenders evaluate your business's financial statements such as the balance sheet, profit and loss statement, and cash flow statement when determining the interest rate.

If your business demonstrates profitability and steady cash flow, lenders perceive it as less risky. Conversely, if your business is struggling financially or has inconsistent cash flow, lenders may view it as a higher-risk proposition.

7. Collateral

Collateral refers to assets that borrowers pledge against their loans. The presence of collateral can impact the interest rate offered by lenders.

Borrowers who offer valuable collateral may be eligible for lower interest rates compared to those who do not provide collateral. Collateral acts as security for lenders in case of default.

8. Economic conditions

Economic conditions, such as inflation and GDP growth, can impact business loan interest rates. Inflation increases the cost of borrowing, while a strong economy may result in lower interest rates

Additional read: Flat Or Reducing Rate Of interest

How to secure a business loan with low interest rate? 3 Tips

3 things to keep in mind when trying to secure a business loan low interest rate:

Improve your credit score and reduce existing debt to increase your eligibility for low business loan interest.
Explore various lenders as it will help you get the most competitive interest rates.
Offer valuable assets or personal guarantees to secure the loan. It ensures that the lender's risk is reduced, potentially qualifying for lower business loan interest rates.

Conclusion

To secure a business loan with favorable business loan interest rates and conditions, focus on maintaining a good credit score, and choosing the right type of loan for your business needs.

Mahindra Finance offers attractive interest rates with flexible repayment tenures and minimal documentation. These business loans cater to different needs such as working capital loans, machinery loans, equipment loans, and more.

Apply now with Mahindra Finance to explore a range of business loans and find the right solution for your entrepreneurial journey.

FAQs

Q1. What factors determine if I qualify for a low-interest business loan?

Credit score, business financials, collateral availability, and economic conditions determine eligibility for a low-interest business loan.

Q2. How can I improve my credit score to qualify for a business loan with a low-interest rate?

Maintain timely payments on existing loans, reduce debt-to-income ratio, and avoid opening unnecessary new credit accounts.

Q3. How to get a business loan at a low-interest rate?

To get a business loan at a low-interest rate, make timely EMI payments, develop a robust business plan, improve financial statements, consider refinancing, and provide collateral.