Business Loan Interest Rates - Compare
Business Loans are those which are given to a self-employed individual or an entity to help expand or sustain their operations. By nature business loans are unsecured which means that they do not need any security, collateral or guarantor.
They are given solely on the basis of the sustainability and profitability of the business, trade, factory, plant that you are invested in. These loans are quite different to mortgage loans, liens, capex loans or loans against machinery which require some security or involve a collateral. These are both different category of loans and thus are approached in separate manner by banks. In the case of unsecured business loans, you will be judged in different criteria most important of which are your revenues and profitability. Check our eligibility calculator for business loan to know if you have the appropriate credentials to get a business loan from one of our partner banks or NBFCs.
You will also find a lot of private lenders who will be willing to lend to you if you own a shop-owner, factory, plant or are a trader, merchant, business owner or also if you are a successful mechanic, plumber, craftsman etc. The basic criteria will remain the same which is your ability to pay back the loan amount along with interest. Visit our section on EMI calculator for business loan to know more about your monthly outflow when you take a business loan from a bank, NBFC or a private financer or private lender. The different documents required for business loan are also listed on the relevant page on our site.
Business Loan Interest Rates - Explained
Interest rate for business loan is the extra payment you have to make to a lender over and above the principal amount when you take a loan. It is compensation for taking money from a lender for your use costing him money he could have made with some other investment. It is also a reward for the risk he takes by giving you the money at the cost of any potential delay or default in payment. Interest rate is usually calculated as a percentage on the principal amount calculated for specific periods, which could be a month or a year. EMIs are the payment you have to make every month to the lender to repay a loan. This includes part of the principal amount borrowed and a part of the interest. There are various methods of calculating interest rate based on the lending entity as well as the type of loan. Normally interest rates are lower for secure loans like mortgage, home, vehicle or LAP loans because the lender has a security if you default. Unsecure ones like personal or business loans have higher interest rates due to the inherent risk in them. The two ways of calculating interest rate on business loan depending on the lender are as follows:
The first method is based on whether the interest is calculated on the initial principal or on the balance outstanding principal. The difference between reducing balance rate of interest and flat rate of interest is shared below,
Reducing or Diminishing Rate of Interest
In this case the business loan interest rate is calculated on principal amount outstanding at the end of a specific period. As detailed above, with every EMI paid there is a certain portion that is adjusted against the principal and the balance goes towards interest. While calculating the interest, the next calculation is on the principal balance outstanding and not the initial principal amount. To understand this better let us look at the example below,
Let us assume you have a loan amount of Rs. 15,00,000 with an interest rate of 18.5% which needs to be repaid in 4 years. The EMI in this case would be Rs. 44,455/- per month. In the 1st year, you pay a total EMI of Rs. 5,33,464 of which Rs. 2,54,641/- goes for interest and the balance Rs. 2,78,823 goes towards interest. Now the interest rate is calculated at 18.5% only on the balance principal amount i.e. Rs. 12,21,177/- . Using this method if you have the ability to pay larger amounts as part payment, you will reduce you interest paid. The lowest interest rate for business loans by way of EMIs are possible to obtain through this method.
Flat Rate of Interest
In this case the business loan interest rate is calculated on the initial principal amount without accounting for the principal repaid. This method of interest calculation results in a higher EMI. This can be understood better with the example below,
Let us assume you take a Rs. 10,00,000 loan at 20% interest rate. The interest component for every year would be 2,00,000/-. So in case you would like to repay the loan in 3 years, the total of the principal amount and the interest rate would be Rs 10,00,000/- + Rs. 6,00,000/- i.e. Rs 16,00,000/- This will be divide by 4 years i.e. a total Rs 16,00,000/- divided by 48 months. The same in case of a reducing balance approach would be would be much lesser. Most of the private lenders lend a business loan using this flat rate of interest approach but the process would be relatively quicker.
Interest rates for an online business loan are calculated on the same basis as those for a personal loan. Most banks and NBFCs will provide you an interest rate based on the reducing balance method while most private lenders will impose a flat rate on interest. In the case of banks and NBFCs the tenure is longer so you have a smaller EMI burden but having to pay interest for a longer duration on a reducing balance. Private lenders prefer to give loans for a shorter duration so your EMIs will be higher and the flat interest also has to be paid within that period. Business loans are not suitable to be invested in an asset with a long gestation period as your will have to start paying the EMIs immediately. So think carefully about your need and pay-off before taking a personal loan. If you think it is suitable apply online now for a business loan with us and will provide you with information on your eligibility with various banks, NBFCs and private lenders.