As the Indian economy expands, courtesy growing support to SMEs and MSMEs, the financing sector hasn’t been much far in catching up. Today, irrespective of the sector you operate your venture, a standard or customised business loan option is not hard to find. Lending institutions today have successfully penetrated the country’s most marginalised locations to provide necessary funding to businesses operating there.
In all this, one of the most essential factors that always catch the entrepreneur’s attention is the levy of business loan rates to different funding options. Other essential features like loan amount availability and repayment flexibility also contribute significantly in helping a businessperson decide on the right business loan for his/her venture. Let’s take a look at the essential aspects related to these loans.
Interest Rates and Charges on Business Loans
The financial market provides business loans to ventures as both secured and unsecured advances, allowing them to choose between them for financing suitability as and when needed. The business loan rates also vary depending on the type of advance selected. For instance, secured business loans attract low rates as they involve lesser risk for the lender and are secured by a high-value business asset.
Contrarily, interest rates on unsecured business loans can be a notch higher than their secured counterparts due to the higher risks of lending involved. However, this does not mean that these loans are not affordable. Selecting the lender offering the lowest rates and employing certain ways of improving the loan eligibility can help secure affordable and competitive rates that allow you to repay in easy EMIs.
However, certain factors related to business loan rates apply to both unsecured and secured advances that you must know about.
Method of interest rate calculation
Lenders employ two methods in calculating the interest on your business loan, which, of rightly selected, can make a sizeable difference in your total repayment liability. They are –
- Floating rate calculation
Under the floating rate method of interest calculation, interest rate is levied based on the market trends, change in policies and such other factors. Thus, herein the interest rate you are offered for your business loan during loan sanctioning can be readjusted during the tenure for good or for worse.
You thus need to choose it cautiously after having considered the market trend predictions and past trends. A well-timed business loan at floating rate can help save you significantly on your total repayment liability.
- Fixed rate calculation
As against the floating rate system, interest calculation under the fixed rate system is based on the interest rate fixed at the initial stage of loan sanctioning. Fixed business loan rates are, however, set at a notch higher than floating rates, which can be disadvantageous for the borrower.
Nevertheless, the interest calculation system has its set of pros too, For instance, you can benefit from a fixed rate system when the market trends suggest a rise in future rates.
For floating rate calculation, lenders also use the benchmarking system that helps determine and adjust the rates s per changes in monetary policies and market trends. Under this system, an internal or an external benchmark is set that defines the minimum rate at which a lender can extend the loan to borrowers. Based on this rate, the lender adds a certain spread to arrive at the retail interest rate at which the loan is extended to the borrower.
Several borrower-based factors also impact the interest rate on business loans, which can be leveraged suitably to secure competitive rates on the advance. Such factors can include income, repayment capacity, credit history, etc.
It is also ideal to know about some important features of these advances along with the business loan rates that should help you decide on the best loan option. Let’s take a look.
Important Business Loan Features
Apart from the type of loan already mentioned earlier, the following are some of the most important features you must take care of when availing of a business loan.
- Loan amount: Lenders offer high-value financing as business loans, both collateral-based and unsecured, to ensure sufficient availability of funds to the different ventures. While the secured option can easily cross Rs.1 Crore, unsecured business loans from reputed lenders can be secured up to a value of Rs.25 Lakh. All you need to do is meet the eligibility and document requirements.
- Tenure flexibility: You can also avail the loan with sufficiently flexible tenure, which shall allow you to repay the advance conveniently. Unsecured business loan tenure can go up to 5 years while secured options are often long-term.
- Flexible financing: Financial institutions also provide the flexibility of withdrawal from a pre-sanctioned loan amount, allowing you constant liquidity supply for the business without bearing unnecessary cost.
Make sure to meet all eligibility and document requirements before applying for the advance to experience hassle-free loan processing. It is also best to go for a comparison of available lenders in the market to arrive at the lowest business loan rates for improved affordability.