Indian public and private banks provide loans to qualifying businesses and charge interest at the start of the equated monthly instalments (EMIs). Businesses with a credible balance sheet and good credit rating score have a better chance of getting business loans. However, getting a loan requires a process of document submission and verification, and only after that the loan is approved.
Here we discuss the interest rates charged by public and private banks in India and their assessment process to help you prepare your business loan application.
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Interest rates for business loans offered by public and private banks
Business Loan Interest Calculator
Lending institutions borrow business loans by calculating the total amount to be borrowed, interest rate, and tenure. This amount is to be paid as monthly installments (EMIs). Here is an example to calculate EMIs:
For example, if you borrow a business loan of INR 100,000 for 10 years as working capital at 7.2% annual interest, your monthly EMI payment will be calculated as follows:
P × R × (1+R)^N / [(1+R)^N-1]
P: Principal Loan Amount = INR 10,000,00
N: Loan term (in months) = 120 months
R: Monthly interest [7.2/12/100] = 0.006
EMI= INR 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = INR 11,714.
So, you will be paying an EMI of INR 11,714 every month for 10 years.
Types of business loans
There are various types of business loans offered by lending institutions in India. Some of the popular ones are:
Unsecured Business Term Loans: Lending institutions offer business term loans which are repaid as a lump sum as EMIs plus interest over a fixed period of time.
Cash Credit: This type of loan is disbursed to businesses for a short period of time, usually up to 12 months. It is popular with businesses as interest is only paid on the amount withdrawn and not on the total amount approved.
Overdraft for Businesses: Banks provide overdraft facilities to businesses and set a maximum borrowing limit that can be withdrawn at any time. The difference is that there is no fixed repayment pattern as long as interest is paid periodically.
Real estate secured business loan: A type of secured loan that allows a business to borrow money from a lending institution using business assets or real estate as collateral.
MSME Gold Loan: Similar to a property secured loan, businesses can obtain a gold loan (usually up to 75% LTV) by using the value of gold as collateral.
Eligibility Criteria for Business Loans
Eligibility to apply: All MSMEs and business units, companies, trusts and associations.
Length of business operation: Minimum 3 years.
Business Turnover: Minimum of Rs 25 lakh (depending on bank policy).
Income Tax: Companies must have a certificate of latest Income Tax Return (ITR) certified by CA Audit, calculation of business income, balance sheet with profit and loss statement for at least two years.
Borrower age criteria: 21 to 60 or 65 years at the time of loan maturity.
Documents required for applying for a business loan
Factors that affect business loan interest rates
There are several factors that affect business loan interest rates, the main ones being:
Commercial Credit Score (CCR): Lending institutions require a commercial credit score to be carried out when starting the process of availing a business loan. This is to evaluate the financial health of the company. CCR ranges from 1 to 10, with scores closer to 1 being considered excellent. Companies with a CCR score closer to 10 may face stricter eligibility screening and the interest rates for such business loans are usually higher.
Credit Score: An individual's credit score plays a vital role in availing low credit scores. Banks consider a credit score above 750 as good credit. A low credit score usually results in a strict qualification process and higher interest rates for loans.
Secured and Unsecured Business Loans: Interest rates on secured business loans are usually lower due to the value of the asset provided as collateral for the loan.
Loan amount and term: Generally, if your business requires a large loan over a long period of time, the interest rate on that loan will be higher. Also, the longer the loan term, the higher the interest rate.
Fixed or floating interest rates: With a fixed interest rate, a company is charged the same interest rate for the entire tenure of the loan, irrespective of market conditions. On the other hand, floating interest rates tend to fluctuate with changing market conditions due to changes in the Reserve Bank of India's (RBI) repo rate.
Industry and market conditions: Some lenders may evaluate the current conditions of the industry in which your business operates to determine the risk and interest rate of the loan.
These are just a few of the factors that influence business loan interest rates. Lenders thoroughly evaluate a company's overall financial position, relationship with the bank, business operations history, and economic performance when assigning business loan interest rates.
Tips for getting a business loan at a low interest rate
The key to qualifying for a low-interest business loan is to keep your financial records up to date so that the bank can determine whether your company is making a profit or losing money. For example, the loan can be taken out to expand your business or to recover from losses.
Nevertheless, taking into consideration your business relationship with the bank, your history of business operations, and your record of paying off past loans can play a key role in getting a low-interest business loan.
Here are some tips to consider:
Improve your personal credit score rating. Pay current dues regularly or don't default on EMI payments. Design a proper business plan. Carefully evaluate the types of business loans available (see above). Improve your business's financials. Give a perspective of how a business loan can help your finances. Provide collateral, if required. Build a good relationship with the lender.
Key Features of Business Loans
Term Loans: These are short-term loans given to businesses to purchase assets like land, buildings, plants, machinery and equipment etc. Corporate term loans have a repayment tenure of up to 5 years and EMIs are payable with or without grace period.
Project Finance: Business loans provided to medium to large companies to acquire large assets, with repayment periods of 5 years or more.
Balloon Loan: Banks offer businesses the opportunity to pay interest on the loan over the life of the loan, with the principal being paid in a lump sum at the end of the loan term.
Working capital loans are short-term loans that give a business the ability to pay the interest on the loan within its term, with the principal being paid in a lump sum at the end of the term.
Working capital loans are short-term loans provided to businesses to assist with business operations, with a repayment period of at least one to three years.
Real estate secured loans: As the name suggests, these loans are secured by real estate (your own or your business).
Securities-backed loans: Borrowers can earn attractive ROI by applying for a business loan through existing securities such as fixed deposits, mutual funds, stocks, bonds, and insurance policies.
Government Schemes: Government funded schemes such as PM Mudra Yojna provide loans of up to INR 10 lakh to eligible businesses.
Tax Benefits: Under the Income Tax Act, 1961, interest on business loans paid out of business profits is exempt and deductible.
Frequently Asked Questions (FAQ)
Which banks are best for low interest business loans?
The interest rates for the aforementioned business loans vary widely depending on your eligibility and documentation. The interest rates available for loans to businesses vary based on your business credit score (CCR), personal credit score, secured and unsecured business loans, industry and market conditions, and more.
Are business loan interest rates fixed or variable?
Depending on the bank's lending policy, interest rates on business loans can be fixed, floating, or both. With fixed interest rates, businesses are charged the same interest rate for the entire tenure of the loan, regardless of market conditions. Floating interest rates, on the other hand, tend to fluctuate with changing market conditions due to changes in the Reserve Bank of India's (RBI) repo rate.
How can I get the lowest interest rate on a business loan?
To get a personal loan, consider the following:
Improve your personal credit score rating. Pay your current bills regularly and when they are due. Create a proper business plan. Carefully evaluate the types of business loans available (see above). Improve your business's financials. Provide collateral. Have a good relationship with your lender.
I recently started a business. Can I still get a business loan?
No, financial institutions require that the business has been in operation for at least three years.
What are other ways to get a business loan?
You can also pledge your assets to qualify for a loan with an ROI. You can also use securities to get an attractive ROI if you apply for a business loan through existing securities like fixed deposits, mutual funds, stocks, bonds, insurance policies, etc. Even a guarantor can come on board.
Are there any discounts available for certain types of businesses?
Companies can get ROI discount of up to 1% by taking loans against collateral or assets.Furthermore, discount of up to 0.25% will be given to companies with good external credit ratings by external credit rating agencies like Small and Medium Enterprise Rating Agency (SMERA) and ICRA, ONICRA and CRISIL.