Factors That Influence The Cost Of a Business Loan

cost of business loan

When you want to get a business loan in India, it has become very comfortable and easy. However, you should make sure to select the right financial provider who charges lower fees and interest rate, which can be a challenge. There are many banks and NBFCs in the country which are offering business loans for businesses under financial need.

You should make sure to compare well and choose the one which best suits your own benefit. Also, you should also make sure to understand the factors which are influencing the cost of your business loan.

Here we are going to analyze the top five factors which will impact your business loan amount:

Interest Rate at which You Get the Business Loan:

The most crucial factor which will influence your business loan amount is your interest rate for the loan. Business loan interest rates start from as less as 13% up to 20%, which will change depending upon the loan amount you choose, loan type and loan tenure you select and your credit score. The interest rate is the rate charged over the principal amount which you borrow for your business loan.

When you are repaying the loan, you will have to repay both the principal amount and interest rate accumulated for the loan tenure. For example, when you borrow Rs.10 lacs as loan for an interest rate of 13% for five years, then the interest payable towards it will be Rs.1,365,184. For a monthly installment, it will be around Rs.22,753.

The interest rate for a business loan varies from one financial institution to the other. When you choose the higher interest rate, the cost for the loan will be high, and when you select lower interest rate loans, your loan cost will also be less. When compared to banks, NBFCs are the best option which people often choose to get their.

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from because of their flexibility with the loan. So always make sure to do a thorough check on all the loan providers before finalising the one which best suits your requirements and financial stability. 

Tenure at which you Get the Business Loan:

The business loan cost and the loan tenure are two significant components which you should understand before opting for a business loan. The business loan tenure is the period for which you will have to repay the business loan amount you borrowed. Usually, the business loan tenure ranges from six months to five years, which you can choose depending upon your financial stability and the loan amount which you borrow.

When you choose the longer loan tenure, the cost will be higher, and when you want a short term repayment, the cost will also be reasonable. For instance, when you borrow Rs. 10 lakhs for three years tenure, then the interest payable will be Rs.1,212,982 for which the monthly installments will be Rs. 33,694. When you choose a shorter tenure, the EMI amount increases but the overall cost decreases.

When you want to be debt-free when you are repaying your loan, then you should choose a tenure which is comfortable for your financial needs. If you can cope up with higher monthly EMIs, then you can choose a shorter tenure and repay the loan as rapidly as possible. It’s always better to go for a longer tenure to handle the pressure of your huge EMIs.

Repayment Flexibility at which you Repay the Loan:

Repayment flexibility is something significant which varies depending upon the financial institutions you choose to get your loan. For example, the financial institution which provides you with a flexible option to repay your loan, then you will have to pay only the interest rates for initial months before starting to pay the standard EMIs.

In some cases, you will also be allowed to pay a lump-sum for over some time. Flexibility in a business loan repayment will help you with managing your finances better and reducing the subsequent stress and the higher loan cost, which will affect your finances.

Collateral that you Provide for the Loan:

When you cannot afford to pay collateral for your loan, then you will have to pay higher interest rates towards it, which is also known as unsecured business loans. If you provide collateral towards your loan, then the interest rate will be lower for the loan which is known as a secured business loan.

You should make sure to bargain the best to get a collateral-free loan when you don’t want to put your business asset as collateral. However, when you are ready to pay a hefty interest rate, then you should choose a secured business loan with a guarantee. The guarantee which you pledge towards your loan will be in control of the bank or NBFC where you got the loan until you repay them completely.

Additional Charges which comes Alongside Loan:

You should also make sure to compare the additional charges which come along with the loan. Before selecting your financial institution and the loan type which you want, you should make sure to check the fees which come along with the loan and check whether it is reasonable. Also, check whether they have any hidden charges towards the loan, which will increase the loan cost or not.

Processing Fees:

A processing charge will be mandatory in some financial institutions for all the participants, which will vary between 1% and 3% for the entire loan amount. Sometimes the financial institutions will not ask for any processing fees towards their loan to attract customers.

Prepayment And Part-Payment Charges:

You can repay the loan completely when you have paid a certain amount of EMIs or partly pay your loan by reducing your burden on monthly EMIs. The financial institution will charge prepayment and part-payment charges, which will be a certain percentage of your outstanding loan amount. These fees are lower when compared to business loan interest rates.

Other Charges:

Other charges include underwriting charges, credit report fetching charges, reporting, documentation, application, guarantee, loan servicing, valuation of inventory and additional general fees and penalties. These charges come along with the business loan will be applicable, so always make sure to question your financial provider well before opting for the loan.

the authorZaki-Xaayow
Zaki Xaayow is an undergraduate student in Yale University. He hails from South Africa and writes articles in his free time. His passion for writing is in the topic of health games and movies. He himself enjoys gaming and loves to write on the same.

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