The average interest rate on commercial loans varies depending on factors like loan purpose, type of business, borrower’s credibility, etc. The standard range of annual percentage rates (APRs) lies between 3 and 7% for traditional bank loans. As for alternative online loans, the APRs may vary between 11% and 44%, and sometimes even higher. Not all lenders, however, use APRs to calculate commercial loan interest rates. So, your finance plan as a business owner will also need to factor in APRs or something called factor rates from lenders. Sometimes, lenders may also charge you an interest rate on a weekly or monthly basis. The latter, however, can be converted into an APR.
Sounds confusing? It’s not. If you are aware of the types of commercial loans, calculating the interest rate becomes simple. Read on to find out more.
Types of Business Loans and Interest Rates
Depending on the nature of the business, there can be different types of business loans. The commercial loan interest rates are determined mainly by this.
1. Term loan
Loans that have a specific repayment tenure are called “term loans.” These loans come with a fixed or floating interest rate.
- The commercial loan interest rates on fixed-rate loans range from 10.55% to 18%.
- Floating interest rates on business loans range from 8.9% to 16.4%.
2. Working capital loan
You may also want to include a working capital loan in your business finance plan. This is a credit facility that you can avail of to manage your daily business activities. By nature, they are short-term business loans that can be paid off within a year. Depending on the type of loan, commercial loan interest rates may vary from 1% per month to 26% per annum.
3. MSME loan
MSME loans can be offered in the form of cash credits, overdrafts, working capital loans, or term loans. Depending on the type, commercial loan interest rates may range from 1% per month to 26% per annum.
Overdraft facilities allow you to withdraw money from your savings or current account even when the account balance is zero. In this context, overdrafts are an extension of the banks’ credit facilities. Commercial loan interest rates on overdrafts vary from lender to lender and are mostly determined by your account balance.
5. Cash Credit
Depending on your company’s creditworthiness and financial history, you may qualify for a cash credit or a short-term loan. This type of loan has a maximum repayment period of 12 months.
6. Invoice discounting
Invoice discounting, also called bill discounting, is another way to get short-term financing. You can sell unpaid invoices with a payment date in the future and get a commission from the lender.
7. Letter of credit
An LC, or Letter of Credit, is a great finance option for those businesses that are involved in international trade. If you are an exporter, you can get an assured guarantee of payment from banks or non-banking financial companies (NBFCs) on your exports. The commercial loan interest rates depend on the tenure.
8. Loan on machinery
As the name suggests, you can apply for a machinery loan to acquire new equipment or machines, which will, in turn, increase business output. This is supposed to increase business profits, which will help you repay the loan.
9. POS loans
POS, or point of sale, is nothing but the place where customers make an actual purchase and pay for it, like in a retail store. For business owners, this is the retail management system, as it is directly linked to sales, inventory, and customer management.
10. Government loans
Various government schemes and policies have been devised to cater to the needs of business owners and facilitate the ease of doing business in India. Some of the most popular loans that you can avail of at great commercial loan interest rates are Mudra loans, National Bank for Agriculture and Rural Development (NABARD), Stand Up India, Small Industries Development Bank of India (SIDBI), and the Prime Minister’s Employment Generation Program (PMEGP).
Factors that Affect Commercial Loan Interest Rates
Commercial loan interest rates depend on a combination of important factors discussed below:
- Nature of your business: Loans are classified as priority or non-priority based on the business sector that you are working in. Non-priority sector loans usually have a higher interest rate.
- Years in business: The longer you have been in business, the better your chances are of securing a commercial loan. You have to be mandatorily in business for at least 2 years in order to apply for a business loan.
- Turnover: Your monthly business turnover determines what type of loan and commercial loan interest rate you will be able to get. The turnover reflects your profits or losses, which ultimately determine your loan eligibility.
- Credit score: Your business’ credit score is a reflection of its credit history and creditworthiness. A credit score of 750 or higher is considered good when applying for a loan.
- Collateral: High-value collateral ensures you get more benefits while availing of a business loan.
- Lender type: Banks usually charge a lower commercial loan interest rate compared to NBFCs or microfinance institutions.
It is thus very important that you keep these factors in mind while applying for a business loan. A high commercial loan interest rate is something you may want to avoid, as it may hurt your business in more ways than one. For more such knowledge-building articles, follow the Piramal Finance blog.