All You Need to Know About the Average Interest Rate on a Business Loan in India 2022

No matter how big or small a business is, it needs money to do everything. Funding is needed not only as a one-time investment but on a regular basis as working capital. Not everyone will always have enough money to invest in a business when needed. 

Some days you’ll need a lot of money, and other days you won’t need any. You would all like to get a business loan with a lower interest rate. This article will provide you with information about the interest rate of business loan. You will also learn about start-up business loans, small business loans, and business loan for new business. 

Types of Business Loan Interest Rates

There are two types of interest rates for business loans: 

Reducing Interest Rate

The reducing interest rate is the rate that is calculated monthly on the remaining loan value. In this method, the EMI includes both the principal and the interest that is due each month on the amount of the loan that is still owed. 

With each EMI payment, the amount still owed on the business loan goes down. So, the interest rate for the next month is based only on the amount of the loan that is still owed. The interest is calculated by multiplying the interest rate per payment by the remaining loan amount. 

Flat Interest Rate 

A flat interest rate is the interest rate that is calculated on the full loan amount over the life of the loan. It does not take into account the monthly payments that will reduce the principal amount and, in turn, the interest rate.

So, the effective interest rate is much higher than the nominal flat interest rate. A fixed interest rate is calculated as Interest Payable per Payment = Original Loan Amount * Number of Years Interest Rate p.a. / Number of Payments.

Average Business Loans Interest Rate in India 2022

Depending on the loan type, the typical interest rate of business loan varies. Business loan interest rates typically range from 15% to 24% annually. 

Since there are many types of business loans available for clients with a wide range of credit scores, interest rates are ambiguous.

Factors that Affect the Interest Rates on Business Loans

The interest rates on a business loan are affected by the following factors:

Types of Business

Most of the time, the lender puts the loan into one of two categories: non-priority sector or priority sector. The interest rate on non-priority sector loans is higher than that on priority sector loans. So, the interest rate of business loan depends on what kind of business you run. 

Business Existence 

The longer your company operates, the better for you. No matter what kind of business it is, it must have been operational for at least two years. If you’ve been in business for a long time, you have a better chance of getting loans with lower interest rates. 

Monthly Sales 

How much money your business makes or loses each month depends on how much money it makes or loses each month. In short, it’s still a big part of whether or not you can get a business loan. At times, the turnover keeps going up and down. But being consistent is very important because it helps the lender figure out the loan balance and how to pay it back. 

Credit Rating 

Your credit history is used to determine your credit score, which is a measure of how reliable you are with money. If you have taken out a loan previously and paid it back on time, or if you pay your credit card debts on time, you will receive a high credit rating. If your credit score is 750 or higher, it will help you when you apply for a business loan. If you have good credit, you’ll get more benefits, such as lower interest rates and more time to pay back debts. 

Collateral/Security 

The security that is given to the lender while applying for a loan is called “collateral.” The more valuable the collateral, the more you will get out of it. The bank is protected by things like equipment, real estate, machinery, deposits, and very valuable home equity. If the risk is low, the bank may give you a larger loan after looking at the collateral. 

Type of Lender 

Different lenders charge different interest rates on business loans. But if you compare the interest rates that banks and NBFCs charge for business loans, you’ll find that banks usually have lower rates than small finance banks (SFBs), microfinance institutions (MFIs), and non-banking financial companies (NBFCs). 

Rules to Follow After Taking Out a Business Loan 

Here are a few general rules you need to follow after you take out new business loans: 

Before getting the money, make a six-month financial forecast 

You should make a plan for how your business will do financially. This will help you keep track of your spending and earnings for another six months. By doing this, you’ll also be able to change your budget if you need to. You might also find it helpful to make a budget for yourself. 

Don’t borrow more than you can afford

It’s important to only borrow as much money as you need. If you borrow more than you need, it could put unnecessary stress on your finances. You should only borrow money if you are sure you can pay it back. 

Never use a business loan to pay off personal debt

This is the biggest error that new investors make. It can be tempting to use money from your business to pay for personal expenses, but this is a bad idea. Not only will it hurt your business, but it could also land you in legal trouble. 

The Bottom Line

Business loans are an effective way to get quick financing for your vital needs. You may give your dreams wings and help you reach new heights. Yet, before applying for and closing on a business loan, you should carefully examine the factors affecting business loan interest rates. 

For more blogs on business loans, check out Piramal Finance and explore their products and services.