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 reduce interest rates when the credit supply is in excess of the credit demand. A small business should apply for a business loan when the demand for credit is low or the supply of credit is high.
- Credit Standing: The credibility position of the business and the personal credit score of the business owner is the most critical aspect when it comes to pricing of the interest rates. A higher CIBIL score depicts the borrower’s ability to repay the business loan in a timely manner. The lenders extend business loans at lower interest rates when the borrower’s credit score is high for example over 750.Improving the credit score by promptly clearing outstanding debt and timing the cash flows with the interest liability can help lower interest rates on future business loans.
- Business experience: Fintech lenders extend business loans for both the inceptionstage and growth stage of business. A business owner can raise funds via business loans for the commencement of new business or expansion of his existing business. Generally, lenders charge a higher interest rate on start-up loans due to the higher probability of default or non-payment. On the other hand, business loans for business expansion purposes are charged competitive rates. Further, a business with several years of continuous operations and stable income would be in a better position to negotiate a lower interest rate.
- Business type:Lenders assess the borrower’s credit risk based on the type of business. The lenders have in-house profiling of business sectors based on the risk involved. Thus, they may charge a higher interest rate on business loans to such industries to cover the lending risk.
- Annual turnover:Lenders decide the business loan amount and the interest rate based on the business’s turnover. Ultimately the revenues are utilized towards servicing the repayment of the business loan. A higher turnover indicates that the borrower’s financial position is positive. Thus, a borrower can obtain lower interest rates in such a case. The higher turnover will also enable the borrower to raise more credit and avail flexible repayment options.
Interest rates are an important factor while availing an unsecured business loan India. Lower interest rates will save financing costs for the business and boost profits. A high, unaffordable interest rate can result in an extreme situation of a debt trap. Therefore, one must evaluate all factors and select a business loan with optimal interest rates.
