Many small business units face challenges in obtaining unsecured business loans at competitive interest rates. Either the interest rates are exorbitant, or the payment structure is unfeasible with high prepayment penalties. This lack of democratization of finance has changed in recent times with the advent of the fintech players. Fintech players focus on the speed of loan processing, efficiency, and ease of business loans disbursement for the customer.
While NBFCs offer unsecured business loans at attractive interest rates, there are some internal and external factors which influence the pricing of the interest rates, which are as follows:
- The rate of Inflation: Inflation increases the prices of products and services. However, inflation reduces the value of currencies and purchasing power in general. The fall in the value of currencies increases the rate of interest on business loans. Fintech lenders extend business loans at higher interest rates if the inflation rate is high and vice versa. So, it is important to factor in the inflation impact before applying for a fast business loan.
- RBI’s monetary policy: The Reserve Bank of India (RBI) changes the monetary policies at regular intervals to maintain comfortable liquidity in the economy and control inflation rate. RBI increases liquidity in the money market by relaxing its monetary policy. The enhanced liquidity results in a reduction in the interest rate on loans. This makes business loans cheaper for the borrower. This is guided by RBI’s repo and reverse repo rates. Thus, it is ideal to borrow when the money supply is excess in the economy.
- Demand and Supply of Loan: The fundamental economic forces of demand and supply play a major role in determining the interest rates on business loans. When the demand for credit grows, lenders charge higher interest rates to book profits. Vice versa the lenders