Tips to Reduce Your Business Loan Interest Rate

While arranging funds for business is necessary, a wise entrepreneur always seeks ways to reduce interest rates on the available financing options. The reason is simple, if you do not get a hold of your business finances early on, the interest component may become a source of major stress during a hard patch.

Today, we will discuss different ways to reduce your business loan interest rate.

Raise Your Credit Score

Your business loan interest rate depends on your credit score. If you are a first-time borrower, consider starting with a short-term consumer durable finance before asking for a business loan. This will help you in improving your credit score. Let us use an example to understand this better:

Assume you are a first-time borrower who has had a stable income for the past six years. Your current credit score stands at 500. Applying for business finance with this credit score will have two possible impacts—rejection of your application form or business loan at a high-interest rate. However, if you apply for a short-term consumer durable loan to purchase your smartphone, DSLR, laptop, or any other product, you can improve your credit score. By paying your EMIs on time, you can easily raise your credit score.

Therefore, to get a low-interest business loan, first, raise your credit score.

Credit History

Credit history is one of the main reasons why your lender charges you a high-interest rate on a business loan. Both credit history and credit score are intertwined. Before applying for business finance, check if you have any outstanding or default loans in your name. If yes, repay them immediately. When evaluating your business loan application, the lender assesses your existing or previous debt history. With the help of your credit history, or say a repayment pattern, financial institutions determine your loan repayment capability. Hence, to qualify for low-interest business finance, you must have a clean track record of credit history.

Improve Your Business Financials

When you apply for business financing, the lender analyses not just your personal profile but also your business profile. The financial institution will either reject your application or charge you a higher loan rate if your company's balance sheet and profit and loss statement reveal unsatisfactory numbers. Therefore, before applying for a business loan, work diligently to improve your company's financial situation. To increase your sales and revenue, try a different sales or marketing strategy. Always remember, a profitable business is the key to low-interest business loans.

Research

There are numerous business loan providers in India. Every financial institution has its own set of requirements and documentation processes. The interest rates as well as other loan-related costs also vary from one another. So, it is advised that you conduct extensive research and compare options to see if a particular lender's eligibility requirements match your profile and loan product meets your business’s needs. Also, compare the interest rates and fees charged by various lenders. You can visit a loan aggregator website for a detailed comparison. Choose a lender who offers a low-interest business loan along with minimum eligibility requirements and a simple documentation process.

Refinancing

One of the ways to reduce your business loan interest rate is refinancing. If you have taken multiple loans to meet your business funding requirements, consolidate all the outstanding debt into a single loan at a lower interest rate. Financial institutions allow refinancing after evaluating your existing financial position. To understand refinancing in the context of low interest rates, let us use an example:

Assume you took a short-term business loan at a high-interest rate when your business was in its early stages and you did not have strong financials to get a better deal. With your financial situation improving, you apply for a business refinancing with your lender. After evaluating your business financials and under the new terms and conditions, your lender may extend your loan term and reduce your interest rate.

Business Plan

When you apply for MSME business finance, the financial institution looks into your business plan. The lender might ask you to present the sales forecast, and project expansion plan, among other things. If you have a solid business plan, you may easily convince the lender to grant you a business loan at a lower interest rate.

Improve Your Relationship with the Lender

One of the best ways to get a low-interest business loan is to apply with your existing lender. If you have ever taken a personal loan, got a credit card, or any other form of loan from a lender and have paid your EMIs on time, it is recommended that you apply for a business loan with the same lender. A strong lender-borrower relationship with your existing lender can help you negotiate a better deal on your business finance.

Conclusion

These tips should help you get a business loan at a low-interest rate. If you would have noticed, all these suggestions point towards demonstrating your trustworthiness to the lender.