3 days Ago
A business loan is often essential for funding operations, expanding a business, or purchasing equipment. However, the interest rate on a loan significantly impacts the overall cost of borrowing. Securing a lower interest rate can save you money and make loan repayments more manageable.
Here are some practical strategies to apply for a business loan and achieve a lower interest rate. 1. Improve your credit score Lenders consider their credit score as a key factor when deciding the business loan interest rate offered .
A higher credit score signals financial responsibility and a lower risk of default. Here’s how one can improve your credit score: Pay bills on time: Ensure timely payment of utility bills, credit card bills, and existing loan EMIs Reduce debt: Lower your credit utilisation ratio by keeping your credit usage below 30% of the total limit Dispute errors: Check your credit report regularly for discrepancies and get errors corrected to boost your score An improved credit score increases your credibility and could result in better loan terms, including a lower interest rate. 2.
Maintain strong business financials Lenders assess the financial health of your business before approving a loan. A well-performing business is considered less risky, which may lead to a lower interest rate. Key financial indicators to maintain include: Stable revenue: Show consistent or growing revenue over time to assure lenders of your repayment capacity Profitability: Demonstrate that your business generates sufficient profit to cover loan repayments Cash flow management: Maintain a positive cash flow to ensure smooth daily operations and timely repayments Keep your financial statements up to date and ready for submission.
Providing a strong financial track record increases your chances of obtaining better loan terms. 3. Provide collateral or security Offering collateral to secure the loan can significantly reduce the interest rate.
Collateral reduces the lender’s risk, allowing them to offer you a lower interest rate. Here’s what you can offer as collateral: Real estate: Commercial or residential property can be used as security Inventory: Use your inventory as collateral if your business is product-based Equipment or machinery: Equipment used in production or daily operations can serve as collateral The higher the value of your collateral, the better are your chances of negotiating a lower interest rate. Ensure that the value of your collateral aligns with the loan amount you’re applying for.
4. Choose a shorter loan tenure The tenure of your business loan affects the interest rate. Loans with shorter tenures generally have lower interest rates because the lender's risk is reduced.
While monthly repayments may be higher, you’ll pay less interest over the life of the loan. Here’s how it works: Short-term loans: Opt for loans with shorter repayment periods Consider your cash flow: Ensure you have the capacity to pay the higher EMIs which come with a shorter tenure Lenders may offer lower interest rates for shorter tenures as it reduces their risk exposure. Calculate your repayment capacity before opting for a short tenure.
5. Build a strong business plan A well-prepared business plan can help lenders completely assess the viability and potential success of your business. This can result in a lower interest rate.
Your business plan should include: Clear objectives: Define the purpose of the loan and how the funds will be used Revenue projections: Provide detailed revenue and profit projections Risk assessment: Highlight potential risks and the strategies to mitigate them A clear, well-structured business plan shows lenders that you’re a responsible borrower with a solid growth strategy. It’s a way to build trust and reduce perceived risk. 6.
Apply for government-backed loan schemes In India, government-backed loan schemes for small and medium enterprises (SMEs) often offer lower interest rates. Examples include: Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Offers collateral-free loans with competitive interest rates MSME loans from SIDBI: Small Industries Development Bank of India (SIDBI) provides loans at subsidised interest rates Mudra loans: The Pradhan Mantri Mudra Yojana ( PMMY ) provides loans at lower rates for small businesses Applying for these schemes can help you access funds at lower interest rates. Check if your business qualifies for any of these government initiatives.
7. Negotiate with lenders Negotiation can play a key role in securing a lower business loan interest rate. If you have a good credit score, a strong financial history, and sufficient collateral, you’re in a good position to negotiate.
Follow these tips: Research market rates: Know the interest rates offered by other lenders for similar loans Highlight your strengths: Emphasise your business’s profitability, stable cash flow, and strong financial position Get multiple offers: Approach multiple lenders to compare offers and use them as leverage to negotiate a better deal Lenders may be willing to lower the interest rate if they see you as a low-risk borrower with competitive offers from other lenders. 8. Opt for loans from online marketplaces Online financial marketplaces like Bajaj Markets provide a platform to compare and apply for loans from multiple lenders.
By comparing offers, you can select loans with the lowest interest rates. Benefits of using online marketplaces include: Comparison of lenders: Access to multiple lenders and their interest rates on a single platform Easy application: Digital submission of loan applications and faster processing Transparency: Clear visibility of loan terms, interest rates, and charges With online financial marketplaces, you can quickly compare loan offers and choose one with a competitive interest rate. 9.
Work on reducing your Debt-to-Income Ratio ( DTI ) The debt-to-income ratio (DTI) is a percentage of your income which is used to pay off your debts. A lower DTI ratio shows that you have sufficient income to manage your debts, making you a safer borrower. Steps to reduce your DTI include: Repay existing loans: Clear off smaller loans to improve your DTI ratio Avoid new debts: Limit the number of active loans you have when applying for a new business loan A lower DTI ratio portrays you as a low-risk borrower, encouraging lenders to offer a lower interest rate.
10. Maintain a long-term relationship with lenders If you’ve had a positive borrowing history with a lender, you’re more likely to secure better terms on future loans. Long-term banking relationships offer several advantages: Favourable interest rates: Lenders may reward loyal customers with lower interest rates Faster loan approvals: Established relationships reduce the need for extensive financial scrutiny Access to exclusive offers: You may qualify for lender-specific offers and discounts Building a good relationship with a lender takes time, but it can pay off when you’re looking to lower your business loan’s interest rate.
Reducing the interest rate on your business loan can significantly lower the overall cost of borrowing. Strategies like improving your credit score, offering collateral, choosing shorter loan tenures, and applying for government-backed schemes are effective ways to secure lower rates. Additionally, comparing loan offers through online marketplaces and negotiating with lenders can help you obtain a better deal.
Take time to prepare your business finances, present a strong business plan, and maintain a healthy lender relationship to improve your chances of getting a lower interest rate on your business loan. Disclaimer - The above content is non-editorial, and TIL hereby disclaims any and all warranties, expressed or implied, relating to it, and does not guarantee, vouch for or necessarily endorse any of the content. Ready to Master Stock Valuation? ET’s Workshop is just around the corner!.
