Interest Rates On Business Loans: How Do They Work?
Capital is an absolute necessity in order to start any company, which is precisely why business owners opt for loans. But before moving ahead with that, you need to understand that business loans don’t work like other credit instruments. Let’s step back and get you acquainted with how interest rates work on business loans.
What is an Interest Rate?
An interest rate is a remuneration you pay to a financial institution for the services and risks they take in lending you money. An institution considers lending you money a risk because they are unsure whether you – the borrower, will repay the loan or default on it.
Factors that Determine Interest Rates
Banks are responsible for dictating the terms and rates of interest on a loan, based on RBI guidelines. They can increase or decrease the rates to their benefit, while keeping an eye on the market scenario as well as their competitors. But here are a few other factors that can decide interest rates.
A sustained increase in the cost of essential commodities and services, otherwise known as inflation in the local economy, has a major bearing in the fluctuation of interest rates of business loans in India. Because when inflation strikes, the original purchasing power of the money you borrow will depreciate, or simply put, the value of the money goes down, which causes the banks to increase the rates of interest to hedge against inflation.
Supply and Demand
The supply and demand of credit are a primary factor that determines whether the interest rates increase or decrease over a period of time. For instance, when there is a rise in the demand for credit, interest rates automatically climb up and when the demand decreases, so do the rates.
Your Credit Score
Your track record of managing your finances over the course of your life plays a key role in determining the interest rates awarded to you. Banks are likely to charge a much higher rate on your loan if your credit history is erratic, since they will be assuming a higher level of risk when lending to you. So maintaining a good credit score is important if you are considering a loan.
Also Read : The Fundamentals Of Your Business Credit Score
How Can One Procure a Business Loan?
Many financial service providers, like Bajaj Finserv, specialise in providing SBAs with low interest rate budget loans of up to 30 lakh, which is the highest unsecured ticket size offered online. Of course, this is dependent on whether you can provide eligibility documents for business loans, such as your income details like IT returns, profit/loss statements of two years, and certificate of your practice.
What is the Eligibility Criteria for a Business Loan?
All the financial institutions list out a number of criterias and necessary documents required to take a loan. According to Bajaj Finserv, you must have/be a Limited or Private Limited Company, Proprietorship or Partnership Company, Self-employed registered professional with your own business entity or a Chartered Accountant.
Obtaining a business loan has never been easier, thanks to the advancements in the field of banking and technology. Several banking organisations, like Bajaj Finserv have made it easy for you to apply for a business loan online.