Public and private sector banks of India provide loans to eligible businesses and charge interest when equated monthly installments (EMI) begins. Businesses maintaining a credible balance sheet and good credit rating score have a high chance of availing business loans, however, they have to undergo documentation and verification process, and only then the loan is sanctioned.
Here’s the interest rate charged by public and private sector banks of India as well as the evaluation process to help you prepare your business loan application.
Table of Contents
- Business Loan Interest Rates offered by Public and Private Banks
- Calculation of Business Loan Interest Rate
- Type of Business Loans
- Eligibility Criteria For Business Loan
- Documents Required to Apply for Business Loan
- Factors that affect Business Loan Interest Rates
- Key Features Of Business Loan
- Frequently Asked Questions (FAQs)
Business Loan Interest Rates offered by Public and Private Banks
Calculation of Business Loan Interest Rate
Lending institutions borrow business loans upon calculation of the total sum borrowed, rate of interest, and tenure — the amount which is paid as easy monthly installments (EMIs). Here’s an example to calculate the EMI:
Say, you availed a business loan of INR 10 lakh as working capital at an annual interest rate of 7.2% for a tenure of 10 years, then the EMI your will be paying on a monthly basis is calculated using the following formula:
P x R x (1+R)^N / [(1+R)^N-1]
P: Principal loan amount = INR 10,000,00
N: Loan tenure in months = 120 months
R: Interest rate per month [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.
Therefore, you would be paying the EMI of INR 11,714 every month for 10 years.
Type of Business Loans
There are various types of business loans offered by lending institutions of India. Here are the popular ones:
- Unsecured Business Term loan: Lending institutions borrowers businesses term loan, which is a lump sum of money and is paid back as EMI with added interest for a certain period of time.
- Cash Credit: This type of loan is disbursed to businesses for a short-term which is usually up to 12 months. Such a loan is popular among businesses as the interest is paid only on the amount withdrawn and not on the total sanctioned amount.
- Business Overdrafts: Banks provide a business an overdraft facility and sets a maximum borrowing limit which can be withdrawn any time. The difference is that there are no fixed patterns for repayment, provided that the interest is paid periodically.
- Business Loan Against Property: It is a type of secured loan which businesses can borrow from lending institutions keeping their business assets or property as a collateral.
- MSME Gold Loan: Similar to loans against property, businesses can obtain gold loans (usually up to 75% LTV) against the value of the yellow metal.
Eligibility Criteria For Business Loan
Who can apply: All micro, small, medium enterprises (MSMEs) and business units, companies, trusts and societies.
Business operation tenure: Minimum three years.
Business turnover: Minimum 2.5 lakh onwards (depending on bank’s policy).
Income Tax: The business should have a certificate of latest income tax return (ITR) certified by CA, audited. Computation of business income, balance sheet containing account on profit and loss for at least 2 years.
Borrower’s age criteria: 21 to 60 or 65 years at the time of loan maturity.
Documents Required to Apply for Business Loan
Factors that affect Business Loan Interest Rates
A number of factors can affect business loan interest rate, and the popular ones include:
Commercial Credit Score (CCR): Lending institutions mandatorily run commercial credit score when initiating the process of availing business loans. This is done to assess the business’ financial standing. A CCR ranges from 1 to 10, with the score near to 1 is considered excellent. Whereas, a business with CCR score close to 10 may result in a rigorous eligibility process, and the interest rate on such a business loan is usually higher.
Credit Score: Individual’s credit score plays a vital role in availing of a low credit score. Banks consider a credit score above 750 as creditworthiness. A low credit score usually means a rigorous eligibility process and higher interest rate on loans.
Secured and Unsecured Business Loan: The interest rate on secured business loans is usually lower due to the value of the asset pledged against the loan as collateral.
Loan amount and tenure: Generally, if your business requires a large loan amount with longer durations, the interest rate is high on such a loan. Also, longer loan duration typically attracts a higher interest rate.
Fixed or Floating Rate of Interest: In a fixed interest rate, businesses are charged the same rate of interest throughout the loan’s tenure regardless of market conditions. On the other hand, the floating rate of interest tends to fluctuate with changing market conditions led by change in the Reserve Bank of India’s (RBI) change in repo rates.
Industry and Market Conditions: Some lenders may also assess the current scenario of the sector your business operates in to assess the risk of the loan as well as interest rates.
These are just a few examples of factors that affect business loan interest rates. Besides, lenders thoroughly evaluate your business’ overall financial standing, relationship with the bank, history of business operation, as well as your financial track record while allocating interest rates on business loans.
Tips to Avail Business Loan at Low Interest Rates
A key to avail of a low interest rate on business loans is to keep your financial records up to date for banks to assess if your company is in profit or running in loss. Such a loan can be taken either to expand your business or to recover from the loss, to cite an example.
Nonetheless, considering your business relationship with the bank, history of business operation, records of paying past loans may play a vital role in availing of a low interest on business loans.
Some of the tips to consider are as follows:
- Improve your personal credit score ratings.
- Pay your current due regularly, or don’t default on your EMI payments.
- Design a good business plan.
- Evaluate carefully on the type of business loan (like mentioned above)
- Improve your business finances.
- Show prospects of how a business loan can help your finances
- Offer collateral if required.
- Build a good relationship with the lender.
Key Features Of Business Loan
Term loans: These are the short term loans offered to businesses to purchase assets, such as land, building, plant and machinery equipment. Term loans for business have a maximum repayment tenure of up to five years, and EMI is paid with or without a moratorium period.
Project financing: Such types of business loans are given to mid-to large-sized businesses to acquire large sized assets. Project financing has a repayment tenure of more than five years.
Balloon loans: Banks offer business to pay the interest of the loan during the term year of the loan, and the principal amount is paid in lump-sum at the end of the term.
Working capital loans: It is a short-term loan offered to businesses to help run their operations, with repayment tenure of minimum one to three years.
Loan against property: As the name suggests, such loans are given against property (self or business).
Loan against securities: A borrower can get attractive ROI if business loan is applied through existing securities such as fixed deposits, mutual funds, stocks, bonds, and insurance policy.
Government schemes: Government-funded schemes such as PM Mudra Yojna offer eligible businesses loans up to INR 10 lakh.
Tax benefit: Exemption on business loan interest paid from business profits is deductible as per the Income Tax Act, 1961.
Frequently Asked Questions (FAQs)
Which bank is best for business loans with low interest?
The aforementioned interest rate on business loans differ widely on eligibility and documentation. The rate of low a business can avail on loans vary as per company’s credit score (CCR), personal credit score, secured and unsecured business loan, industry and market conditions, to name a few.
Is the business loan interest rate fixed or floating?
Depending on the bank’s lending policy, a business loan can be either fixed or floating rate of interest, or both. In a fixed interest rate, businesses are charged the same rate of interest throughout the loan’s tenure regardless of market conditions. On the other hand, the floating rate of interest tends to fluctuate with changing market conditions led by change in the Reserve Bank of India’s (RBI) change in repo rate.
How do I get the lowest interest rate business loan?
In order to get a personal loan consider:
- Improving your personal credit score ratings.
- Paying your current due regularly.
- Designing a good business plan.
- Evaluating carefully on the type of business loan (like mentioned above)
- Improving your business finances.
- Offering collateral.
- Building a good relationship with the lender.
I have recently started a business, can I still get a business loan?
No—financial institutions require that your business be operational for at least three years.
What are the other modes of obtaining a business loan?
You may pledge your property to avail of loans under reduced ROI. Securities can also be used to get attractive ROI if business loans are applied through existing securities such as fixed deposits, mutual funds, stocks, bonds, and insurance policy. Even guarantors can step in.
Are there any concessions available for certain types of business?
Concession of maximum 1% in RoI can be obtained by businesses who avail of loans via security or against property. Besides, concessions up to 0.25% are given to businesses who have a good external credit rating by SME rating agency (SMERA), and others like ICRA, ONICRA or CRISIL.
