Businesses use business loans as a source of capital and compare them to comparable categories such as personal loans for the purpose of obtaining the necessary financing. Despite this, the primary factor in determining the issuance and repayment of a loan is the MSME loan interest rate, which is determined by several factors.
Factors that can affect MSME loan interest rate in India
Description of Business
In India, every lender has its own credit policy. There are some types of businesses and industries that lenders consider riskier than others. Whenever you apply for an SME loan, the lender will look at the type of business you are engaged in before approving your loan request. If your industry or business type is considered risky, a lender may charge a higher MSME loan interest rate for your loan.
How old is your business
Having operated your business for a long time will make your business appear stable to the bank. You have a good chance of repaying the MSME loan when operating a stable business. Therefore, lenders can charge older businesses a lower interest rate than they would to a brand-new business.
Types of loans
The interest rate on unsecured business loans is typically higher than that on secured business loans. A secured loan is safer because the lender has your collateral as collateral against the loan amount, which helps make it easier to repay the loan.
It’s also helpful to have a steady turnover. The lenders will consider your business’s ability to generate decent profits in most years as a positive sign since it boosts your repayment capacity. Loan applications will be rejected if your business has been experiencing losses for quite some time or if your annual turnover is not steady. A lender will typically request a higher MSME loan interest rate on a loan even if it is approved.
The borrower’s creditworthiness is a significant factor that influences both the likelihood that the loan will be approved and the interest rate. Based on several factors, the lender is supposedly prevented from losing money on an MSME loan if the borrower does not pay. Debt-to-income ratios and an individual’s payment history toward all their other obligations, including their other loans and expenses, determine the borrower’s creditworthiness.
Collateral is often used as security for business loans. If a business provides enough collateral to the lender against the MSME loan, the interest rate on such a loan could be lower since the collateral reduces the lender’s risk in lending. In addition, a new/small/ service-related business will face difficulty securing the collateral required to secure a loan. A higher interest rate may be associated with unsecured loans.
Borrowers without good business fundamentals would not be a good fit for lenders. As a result, a business with strong finances makes a great candidate for a loan as the repayments can be trusted without any problems. As a result of the lower risk involved, businesses making a profit will also find that their interest rates are lower. In addition, this is important to gauge whether the borrower can repay the proposed amount of the loan.
The concept of inflation describes the rate at which selected goods and services increase in price at the end of a period. Depending on inflation levels in the economy, interest rates in the economy can differ. As the inflation rate rises in the economy, things become more expensive and the purchasing power of the individual. Interest rates would rise in such a situation. Additionally, the level of inflation impacts the monetary policy of the RBI.