Tips to Lower Interest Rates on Business Loans

A business loan is a popular type of loan opted for by most public and private companies alike to help them grow. The funds that these companies receive can be used towards expansion, the purchase of equipment, or even working capital. However, the primary factor that the business needs to consider is the cost of borrowing. The business loan interest rate can affect the repayment of the loan taken by the company; hence, a lower interest rate can help reduce the financial burden. Here are some helpful tips that can help you get lower interest rates for a business loan:

Maintain a Good Credit Score

The interest rate that you receive is impacted by your credit score. The lender, at the time of verifying your loan application, will thoroughly review your credit profile. A high credit score shows that your company is creditworthy and demonstrates strong financial discipline. Ensure that you maintain a high credit score, repay your debts on time, and avoid defaulting on any payments. Maintain low credit usage and check your credit report regularly to report any discrepancies.

Choosing the Right Lender

There are many lenders available in the market that offer competitive business loans interest rates. Lenders such as banks and Non-Banking Financial Companies (NBFCs) offer business loans with different lending terms. Always compare the interest rates offered to you before applying or finalising a loan. A lender may offer better lending terms depending on your business profile. It is advised that you thoroughly review the different business loan options available to find one that meets your needs.

Opting for a Shorter Tenure

The tenure of your loan directly affects the interest rate of your business loan. A longer tenure makes the loan affordable due to lower monthly instalments (EMIs) but increases your total interest outflow. While a shorter tenure has a much higher EMI, the interest that you will pay will be considerably lower. It is important that you choose a tenure that offers you a balance between the affordability of the loan and overall savings on the total borrowing cost.

Reducing Debt

A high debt-to-income ratio can also impact the lending terms offered to you. If a business has a lot of debt, the interest charged could be higher. This could mean that the lender thinks you may not be able to repay the loan or may default on payments. Pay off any outstanding loans or credit before applying for a new business loan. A lower debt-to-income ratio can help you get beneficial loan offers.

Opt for a Secured Loan

Unsecured loans tend to have a higher interest rate because the risk factor is much higher for the lender. However, you can consider pledging an asset as collateral to get a secured loan offer. This helps lower the lender’s risk and can help you get lower interest rates. Before you apply, ensure that you evaluate the value of the asset correctly and pledge accordingly to get the most out of your loan.

Income and Financials

Lenders typically prefer businesses that have strong financials, a steady cash flow, and a profitable financial report. A good turnover record can help prove to the lender that the business can repay the loan. Before you apply for a business loan, ensure that you keep your financial statements updated. Additional details like Income Tax Returns (ITR), profit and loss reports, and balance sheets can help reflect a strong financial background. This, in return, helps in getting lower interest rates and better lending terms.

Negotiating Terms

The business loan interest rate that is offered to you is not always fixed throughout the tenure of the loan. Some lenders may even allow you to renegotiate better lending terms depending on your financial records and past repayment history. Also, a healthy relationship with the lender can help you request better lending terms. At the time of negotiating, showcase a strong repayment history and financial strength.

Avoid Frequent Loan Applications

When you apply for a business loan, the lender will thoroughly check your financial background to determine if you are creditworthy. The credit report will show the lender the number of loan requests and applications you have made. Too many loan applications in a short amount of time could make you seem like you are in financial distress. Apply for a business loan as and when you need it and ensure that you meet the lender’s eligibility criteria before applying to reduce the chances of rejection.

Application Process

At the time of applying for a business loan, ensure that your loan application form is filled out correctly with all the required details. Lenders thoroughly assess the risk associated with the loan at the time of verification, so it is important to provide accurate details. Submit all the required documents to avoid any delays and chances of rejection. These documents are important because they demonstrate the company’s financial stability, repayment capacity, and credibility. You may be able to get better lending terms if you have maintained clear and correct records.