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Getting a business loan helps you with the desired capital to cater to different business needs. You can get a no-documentation instant business loanof up to Rs. 2 Lakhs and a collateral-free loanwith minimum documentation for up to Rs. 15 Lakhs from Udyog Plus. Business loans help in different business needs, from funding working capital to acquisition of new equipment, extension, or even debt reconstruction. So, as important as it is to understand business loans, knowing the business loan rate of interestis equally important.
When businesses seek financial assistance, understanding the interest rate is key in choosing the right loan. A business loan interest ratenot only determines how much you will repay over the loan tenure but also impacts the overall affordability of the loan.
When applying for a business loan, understanding the types of interest rates is crucial. Typically, there are two main types of interest rates for small business loans: Fixed Interest Rate and Reducing (or Diminishing) Balance Interest Rate. Let’s explore both types to better understand how they work and affect your loan repayment.
A Fixed interest rate remains constant throughout the loan tenure. In this structure, the borrower can anticipate the same interest rate to be paid each month. This makes it easy to manage budgets and plan for long-term financial commitments. Fixed interest rate loans offer protection and stability against fluctuating market conditions.
In contrast, the Reducing Balance Interest Rate (also known as the Diminishing Balance Rate) is applied to the outstanding loan balance. Each EMI payment consists of a portion of the principal amount and the interest calculated on the outstanding loan balance. Every month, after making an EMI payment, the remaining loan balance decreases. Consequently, the interest for the next month is calculated based on the reduced principal amount.
Example: For a loan of ₹10 lakhs, if your EMI includes ₹1 lakh as the principal repayment, the interest for the following month will be calculated on the remaining ₹9 lakhs, and so on.
The interest for reducing business loan method is calculated based on the loan’s outstanding balance after each repayment, making it a more cost-effective method over time. Since it's based on the reduced balance after each payment, the interest payable reduces with each instalment.
For example, suppose you borrow ₹10,00,000 at a 10% interest rate for 5 years under a reducing balance method. In that case, the interest will be calculated on the balance after each payment, lowering your total interest burden compared to a flat-rate loan.
When applying for a business loan, one of the most important factors is the Monthly EMI (Equated Monthly Installment). This is a fixed amount you’ll need to pay each month, including the principal and the business loan interest. Your financial history plays a significant role in determining your eligibility and loan terms. You're more likely to secure betterbusiness loan rate of interestand favourable loan conditions if you have a strong credit history and financial track record.
Ensuring that your EMI payments fit comfortably within your budget without compromising your day-to-day financial needs is essential. Setting aside extra money for your EMI payments will help you stay on track and avoid financial strain.
Processing Fee
When applying for a business loan, a processing fee is charged as a one-time, non-refundable payment. This fee is required to cover administrative and service costs involved in processing your loan application. The fee is generally a small percentage of the total loan amount and does not include taxes.
Several factors influence the interest rate offered to a business loan applicant:
Udyog Plus business loans offer both fixed and variable interest rates depending on the lender’s terms.
Interest rates are influenced by factors such as loan amount, Business vintage for the past 6 months, credit score, and prevailing market conditions.
Yes, you can negotiate the interest rate for a business loan, especially with a strong credit score and financials.
A higher credit score can lead to lower interest rates, while a lower score may increase the interest rate of business loans.
Business Loan Interest Rate