Receiving a business loan in India is very easy. But finding the right provider who will charge a low fee with an interest rate will be a challenge. You can also compare offers by the NBFCs and banks online and be aware of the best deal which is suitable for you. However, at the same time, you must understand that factors are responsible, affecting the cost of your business loan.
Five significant factors have an impact on your business loan’s cost:
Interest Rate: A business loan interest rate starts at 13%. It is the rate that is charged over the principal borrowing amount. When you are repaying the loan, you will have to pay both the interest amount and the borrowed principal amount over a period of time. For example: if you borrow Rs.10 lakhs at 13% for the next five years, the interest amount payable will be Rs.1,365,184. However, the monthly instalment will be Rs.22,753.
The interest rates can vary from a financial institution to the other. The higher rate of interest, the greater will be the cost of the loan and vice-versa. There are several government schemes, and it contains special deals for the agriculture sector. It also contains small and medium-sized enterprises that have women entrepreneurs. However, there is a discount of up to 2% on the standard rate applicable.
The public banks also tend to charge a low rate of interest when compared with private banks and NBFCs. But you should not take this information at face value. The majority of the time, it is vice-versa. It is better to compare the interest rate on the business loan with other banks and NBFCs before finalising any deal.
Loan Tenure: Before investing, you have to understand the relationship between a business loan’s cost and tenure. The tenure of loan is usually from six months and five years. The longer the loan’s tenure, the higher will be the overall cost and vice-versa. When you refer to the above-given scenario, if you borrow Rs.10 lakhs for the three years, the interest amount payable will be Rs. 1,212,982. And the monthly instalment will be Rs.33,694. You should be aware that the EMI amount increases on a shorter tenure, but overall interest payment decreases.
As you may want to keep the loan burden as low as possible, you will have to choose a tenure that will be comfortable depending upon your needs. You should pay the enormous monthly EMIs if you are selecting a shorter tenure or choose a longer tenure if you can handle the EMIs.
Repayment Flexibility: Some financial institutions offer flexibility in repayment that will impact the business loan cost or at least your repayment capacity. For example, when your bank provides a repayment option, you will have to pay only the interest amount in the initial months before you pay for the standard EMIs.
However, at other times, you will be allowed to pay in lump-sum over a period of time. There is an flexibility in a business loan repayment which can help you manage your finance better. It will help you reduce the subsequent financial stress and cost of the loan.
Collateral: An unsecured business loan will carry a higher rate of interest than a secured one. The cost of a loan will vary depending on the type of loan which you have taken. A collateral-free loan is the best bargain if you do not wish to risk any of your business assets in default cases. At the same time, if the unsecured loan is not your cup of tea, then you can opt for a collateral loan instead. Keep in mind that a collateral loan will be in control of the bank or NBFCs until you repay your loan completely.
Additional Fees: when you compare the fees and charges taken upfront by the financial institution and then settle for the one that asks for the lowest fees. Ensure to ask if there is a clause for any hidden fees that could increase the loan cost.
Processing Fees: Processing fees are mandatory for all applicants. They can vary between 1% and 3% of the entire loan amount. However, sometimes the bank may have an issue with a limited period offer of zero processing fees to attract customers.
Prepayment and Part-payment charges: You can prepay your loan after paying a certain number of the EMIs or partly pay the loan in the borrowing period to reduce the burden of monthly EMIs. However, the lender can charge pre-payment and part-payment charges that is a percentage charged over an outstanding loan amount. The charges are lower than the business loan interest rate.
Other Fees: It could be for underwriting, fetching credit report, application, documentation, reporting, origination, guarantee, loan servicing, valuation of inventory and other general fees and penalties.
If you pay the loan on time, you will escape the penalty charges on late or the missed payments. Ensure you do not increase the cost of a loan due to missing payments. There can be charges for cheques that can bounce as well. It is essential to through all the possible associated penalties to a business loan with your provider. Ensure you consider all the costs related to business loans when applying for the right one in India. You should be able to make time to analyse offers with banks and NBFCs. It charges the influence of the cost of the loan before finalising a provider and a loan scheme.