Every few years entrepreneurs need to raise money for their business. You can do it either by approaching a venture capital fund or by taking a business loan from a bank.
If you decide to take the venture funding route, you will have to give a part of your company stake to the investor. However, with business loans, there are no such terms and conditions. While repaying the loan amount to the bank, you have to pay interest on top of the principal amount. This loan interest rate differs from one lender to another.
Over the years, a large number of entrepreneurs have been securing funding by taking out business loans. According to the Sidbi – TransUnion Cibil MSME Pulse Report, micro, small and medium enterprises (MSMEs) took a loan of worth Rs 9.5 trillion in FY 21.
In this article, we discuss how you can get the best interest rate while taking business loans, how to calculate your EMI, and how to calculate the interest rate.
When to Take a Business Loan
Before deciding to go ahead and apply for a business loan with your bank, it’s important to consider the circumstances your business is in, the reason you need the loan, etc. All these factors can play an integral role in determining the interest rate at which you get the loan.
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There are various reasons why you as an entrepreneur would want to take a business loan. Here are some common reasons you might want to take a business loan:
- Expand operations: If your business is growing, you may need to expand your operations to meet demand. This could include hiring more employees, buying new equipment, or opening a new location.
- Cash flow management: Cash flow is a recurring problem for businesses due to which they need funding from time to time. These cash flow issues might arise due to various reasons such as customers delaying payment, seasonal fluctuations, or unexpected expenses. If your business is facing cash flow issues, you should take a business loan to help you manage your cash flow by providing you with the necessary funds to cover expenses during lean times.
- New opportunities: There will come a time when you would need money to invest in a new opportunity. These opportunities can include activities like getting a new contract for which you need to buy raw materials, or a sudden opportunity to buy inventory at a huge discount. These are golden opportunities which you should not let go. You should certainly apply for a business loan that can help you prepare and take advantage of these opportunities without having to dip into your working capital.
Factors That Affect Business Loan Interest Rate
The interest rate at which a bank or an NBFC is giving you the business loan is one of the most important factors for you to decide whether you should take the offer or approach another financial institution.
The interest rate that banks and NBFCs charge differs from business to business. Financial institutions use different permutations and combinations to decide how much interest rate and the amount of business loan to give you. In many cases, these factors are also a deciding factor to determine whether to give the loan or not.
Here are a few factors that banks look at before deciding on your business loan application:
- Credit score: One of the most important factors that affect the interest rate is your credit score. A credit score is a three-digit number which ranges between 300 and 900. A high credit score – usually around 700 – is an indicator of your credit history and determines how likely you are to repay the loan without any default. If you have a good credit score, there is a high chance that banks will be willing to give you the business loan at a low interest rate. Alternatively, a low credit score means that you will have to take the loan at a higher interest rate.
- Sector: Banks and NBFCs give more weight to businesses that operate in a sunshine sector and have bright prospects for the coming years. Depending on the industry your business is in, financial institutions will decide whether to give you a business loan on a low interest rate or not. For example, a company operating in the technology sector will be in a better position to get business a loan at a cheaper interest rate.
- Performance of the business: When you file an application for a business loan, banks will ask your balance sheet to gauge the condition of your company. If you are able to show good performance revenue wise, banks will have more confidence in your ability to repay the loan. This means you can get a business loan at a low interest rate.
- Loan tenure and amount: The duration for which you agree to take the business loan plays a very big role in determining the interest rate. Since financial institutes earn money by collecting interest on loans, it’s in their interest if you repay the loan for a longer duration.
- Market conditions: Depending on how bullish the market conditions are, banks tend to change their lending policy, which affects the business loan interest rate. If the market conditions are not suitable and RBI has increased the repo rate, you should expect banks to charge a higher rate of interest on your loan. The RBI tinkles with the repo rate every now and then to control inflation. Repo rate is the interest rate at which RBI lends money to banks.
How to calculate business loan EMI
As a loan repayment plan you will have to calculate the EMI (Equated Monthly Instalment) amount that you will have to pay once you take the business loan. For this purpose, it’s very important to learn how to calculate business loan interest rate, which is a major factor that determines your EMI. Overall, your EMI depends on three factors, which are:
- Principal amount (P)
- Interest Rate (R)
- Tenure (T)
Before getting the loan, you should always do a proper research on the current business loan interest rate in India and compare business loan interest rates.
In any case, you need a business loan EMI calculator to understand how much money you will have to shell out every month.
If you don’t have a business loan calculator handy with you, it can be calculated using this formula: EMI = P * R(1 + R)T / {(1 + R)T – 1}
For example:If you take a business loan of Rs 5 lakh at 10% interest rate and agree to pay the loan in 24 months, your monthly EMI can be calculated as follows:
EMI= 5,00,000 * 10(1+10)22 / {(1 + 10)22-1}
Based on the above formula, your EMI will be Rs 23,072.
Tips for Getting the Lowest Interest Rate on Business Loans
- Maintain a good credit score: As mentioned earlier, lenders give a lot of weight to your credit score to decide how much interest to charge. So, before applying for a business loan you should spend some time improving your credit score. You can do that by paying your credit card bills on or before time. You should keep separate credit cards for personal and business expenses.
- Approach multiple lenders: To ensure that you are getting the lowest possible interest rate, you should apply to multiple banks and NBFCs. Don’t accept the first loan offer you receive. Shop around and compare interest rates from multiple lenders to find the best deal.
- Healthy relationship with the lender: If you already have a cordial relationship with a lender, you should prefer that lender to others. You can negotiate a lower interest rate with a lender with whom you already have a good relationship with. In case you don’t have a personal relationship with a lender, you should spend time and cultivate such relationships as you will need business loans in the future as well.
- Offer collateral: Banks give secured as well as unsecured loans. Secured loans require you to give the bank a collateral, which it will keep until you fully repay the loan with interest. If you go with a secured loan and offer the bank a collateral, you might be able to better negotiate with the bank to lower the rate of interest.
How Paytm for Business Can Help With Business Loan
Irrespective of the reason you need to take a business loan, you can always rely on Paytm for Business to come through and help you secure the loan you need.
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You can use the Paytm for Business app to apply for a business loan. The loan application process is paperless and doesn’t take much time or effort. You can secure a collateral free business loan from Paytm with an attractive interest rate.
Steps to apply for business loan on Paytm
- Tap on the “Business Loan” icon on the home screen of Paytm for Business app. You can input the loan amount and tenure as per your requirement.
- Once you choose the amount and tenure, you will see details like total payable, monthly instalment etc.
- Next, you have to tap on “Get Started” to proceed. You can also give your consent to get your KYC details from the CKYC to complete your loan application quickly.
- On the next screen, you can confirm or fill in details like your PAN card number, date of birth and e-mail address. Once done, you can proceed with offer confirmation. Once PAN details are verified, your credit score will be checked & KYC details will be verified.
- After submitting your loan application, the loan amount will be disbursed in your Bank A/c. Please ensure that before the final submission all details are correct.
Frequently Asked Questions
Question 1: How many types of business loans are there?
Answer: There are eight different types of business loans:
- Term loan
- Startup loan
- Working capital loan
- Invoice financing
- Equipment financing
- Loan against property
- Merchant cash advance
- Business overdraft
Question 2: What is the interest rate on a business loan?
Answer: Banks and financial institutes charge interest rates anywhere between 10% and 26%. The interest rate will vary depending on different factors such as your credit score, lenders’ terms and conditions, loan tenure, etc. You can find business loan with a low interest rate by doing a thorough research.
Question 3: What is the ideal credit score required to receive a business loan?
Answer: Financial institutions will require a credit score of at least 700 and above to consider giving business loans. To ensure you receive a business loan with lowest interest rate, you should have as high a credit score as possible.
Question 4: Do banks and NBFCs give business loans to sole proprietors?
Answer: RBI mandates banks and NBFCs to give business loans to sole proprietors. As long as your credit score is good enough, you can secure a business loan irrespective of the type of business registration. You also need to ensure that you can produce right business related documents as and when asked by the bank.
