Businesses need capital to operate. This is utilised to leverage their working capital, pay for new equipment, cover the salaries of employees, etc. However, sometimes firms might not have enough funds to pay for expansion, modernisation, carrying out day-to-day requirements, etc. This is when the need to raise capital arises and can be done in two ways, by venture funding or by applying for a Business Loan.

A Business Loan is a Secured Loan offered by banks in India to businesses. The lenders charge interest on the principal amount that a firm borrows, and companies must repay the Loan within a fixed tenure. Business Loan interest rates vary across financial institutions and depend on a variety of aspects. Here are some factors that determine the interest rates:

Market conditions

Based on how bearish or bullish the markets are, financial institutions tend to alter their lending policy. This, in turn, affects the interest rates applicable to Business Loans. So, if the RBI has not increased the repo rate and the market conditions are not conducive, banks charge a higher Business Loan interest rate.

Sector

Banks favour companies that operate in the sunshine sector since these businesses have brighter prospects in the future. Hence, the sector has a crucial impact on the interest rate charged by your lender on your Business Loan. For example, businesses belonging to the technology sector may be in a better position to enjoy a cheaper interest rate.

Credit score

Your credit score is probably the most crucial factor that determines Business Loan interest rates. Credit score refers to a three-digit numeral ranging between 300 and 900. It is an indicator of your credit history and dictates how likely you are to repay your Loan. A high credit score can convince banks to charge a lower rate of interest and vice versa.

Tenure

The duration of your Business Loan also affects its interest rate, and a longer Loan tenure is usually favoured by banks.

Performance

If your business has had a good performance in terms of revenue, banks will have more faith in your capacity to repay the Loan. Hence, they may charge a lower rate. The Indian Government has Business Loans under various schemes. These Loans are offered to MSMEs, individuals, women entrepreneurs, etc., involved in manufacturing, service, and trading sectors.

For example, the PM Mudra Loan is offered under the Pradhan Mantri MUDRA Yojana and the interest rate for this Loan depends on the profile of the applicant and is decided by the lender.