Managing cash flow effectively is at the heart of any successful business enterprise. There can be any number of reasons for a business to be short on funds- slow season, unexpected additional expenses, defaulting production process, extended overdue payments, etc. to name a few. Then there is business expansion to consider. More than anything else, business owners are always in need of above-adequate business finance.
It becomes essential in such scenarios to arrange for an external source of funding, especially if your business is small in size. A Business Loan from reputed NBFCs or banks can help your business sail through rough patches or expand to newer areas.
However, many entrepreneurs are apprehensive of availing a loan because of the burden of repayment. The problem is compounded if the interest rates are high. As such, you must make sure to avail a lowest and affordable business loan interest rate in India, so that repaying it doesn’t put too much strain on your finances.
- Business loan interest rates explained
The interest rates on business loans vary between different financial institutions. There is a minimum rate fixed below which no financial institution can lend funds to an individual borrower. It is known as the Marginal Cost of fund based Lending Rate or MCLR, which is prescribed by the RBI. Any interest rate above the MCLR is acceptable. Financial institutions maintain a certain spread above the MCLR and offer the same as interest rates on their loans above MCLR.
Almost every financial institution offers business finance with different interest rates. You must make a comprehensive comparison of these financial institutions in terms of interest rates offered before finalising your lender. On your part, you must maintain a good business credit score to avail low interest rates on loans.
- Fees and penalties
You must also take various fees and penalties into account. Most financial institutions have prepayment and foreclosure charges, processing fees, bounce charges, penal interest and statement charges. Calculate the final amount that you have to repay at different financial institutions before you take a business loan.
There are several other attractive features of their business loans, which make it an incredibly convenient option, especially for small and medium business houses.
- Fixed vs floating interest rates
The next thing that you need to do is choose between fixed or floating interest rates. Fixed interest rate, as the name suggests, remain constant throughout the tenor. If you are planning to take business loan to maintain your working capital, it is recommended for those who prefer a fixed monthly payment, even though they are higher compared to the subsequent floating rates.
Floating interest rates change with modifications to the MCLR which, in turn, fluctuates when the RBI revises its repo rate. Floating interest rates are ideal when the fixed rate is quite high, and you are confident that it will come down in the foreseeable future. In general, the floating interest rate is always lower than the fixed rate if not for exceptionally irregular market fluctuations.
These are some of the factors that you should keep in mind to avail the lowest business loan interest rates. Use your business loan as an investment to generate better returns in the future.