When you look for a business loan for financing your business related needs, you consider the loan amount you want and the underlying interest rate. You compare between different lenders to find the lender with the lowest interest charges because you know that the interest payment is an additional cost on the loan. But do you know that the business loan interest rate depends on a lot of factors? If you know these factors you can use them to lower the interest charged. So, do you know about these factors?
If you don’t, here they are –
- The business vintage
The duration for which your business has been in existence is an important eligibility criterion for availing a business loan. Besides being an eligibility requirement, the business vintage also affects the interest rate of the loan. If the business is an established one with a long history, the interest rates are lower because lenders are surer of the business to continue and also of the due repayment of their loans.
- Your credit score
Your credit score is also a factor which influences the interest rate on business loan. If you have a high credit score lenders view your favourably and offer loans on reduced interest rates. If, however, you have a bad or low credit score, the loan is either rejected or offered at higher interest rates.
- Your business’s credit score
Not only your credit score is important, it also impacts the interest rate charged by the lender. If your business has been diligently paying off its existing liabilities, the credit score would be good. A good credit score would help you avail a business loan at lower interest rates.
- The type of loan you avail
Business loans are offered both as secured loans as well as unsecured loans. Unsecured loans have a higher interest rate than secured loans because they have a high risk of repayment default. In case of secured loans, there is a collateral security which is pledged against the value of the loan. As such, the lender can possess the collateral for realising the loan and the interest rate is lower.
- The type of business
The type of business you own also impacts the loan interest rate. Lenders consider some businesses to be risky while some to be safe. If your business falls in the risky category, lenders charge a high interest rate because of the underlying risk of repayment default.
- The annual turnover of the business
The annual turnover of your business depicts the profitability and the profitability, in turn, determines the repayment of the loan. If your business has a good history of profits and high turnovers, the loan interest rate would be reduced because the lender would be assured of the repayment of the loan.
- Inflation rate in the economy
This is an external factor over which you have no control. However, inflation does affect the interest rates charged by lenders. If the inflation rate increases, the interest rate would increase and vice-versa.
So, these are the important factors which affect your business loan interest rate. Know these factors so that you can reduce the interest charged on your business loan.