A complete guide on how do business loan interest rates work


What is a business loan?

A business loan is a loan taken for financing purposes for a business. The loan amount can be used to grow the business, be used as capital for the business, and even be used to make purchases like real estate or other assets. Businesses can get loans from banks as well as from other informal sectors. In this article, we will be focusing on loans from banks.

A business loan can be of two types, one with a credit line or one that gives a lump sum payment. As in the case of any loan, the borrower has to pay back his loan with certain interest and charges over time. Borrowers can take different business loan plans based on their needs, ranging from short-term loans to long-term loans as well as loans with payment plans that need you to pay monthly or annually. Furthermore, loans can be either secured or unsecured. Secured loans require collateral such as some kind of asset or investment. In case of failure to repay, the lender can take over this collateral.

Business loan Eligibility:

A business loan can be applied for by different entities associated with businesses such as self-employed professionals, private limited companies, partnership firms, etc. However, for them to be eligible for a business loan, different banks have different requirements.

Some common requirements are:

  • If the business has been functioning for three years and above
  • If the business is a profit-making business
  • If the business has been bringing in a certain turnover, most banks quote a minimum of 10,00,000.
  • If the annual income of the business is a certain amount, most banks quote a minimum of 1 to 2 lakhs.
  • If the person applying for the business loan is over the age of 21.

There also exist different websites that help you calculate your eligibility with something for a loan eligibility calculator.

Business loan Interest rates

While taking a business loan, it is important to keep in mind the interest rate as well as the additional charges that come with it. When you take short-term loans, they tend to have higher interest rates compared to long term loans. As of 2021, the interest rate in India is about 9% interest on average for long-term loans (that are for up to 60 months) to about 15% interest on average for short-term loans (that are for 12 months to 48 months).

Business loans and EMI

Business loans can often be paid back in a myriad of ways. One of them is EMI. An EMI is a system in which you pay back your loan in instalments instead of paying back the whole amount together. EMI ensures that your loan is divided into several monthly sums which are fixed. It includes the principal amount as well as the interest you would have to pay. It makes paying back the loan easier. 

An EMI can be a great way to pay back the loan, especially for companies that are small or just starting out and do not have a lot of capital and turnover already.

To figure out your EMI, you can use a business loan EMI calculator. A business loan EMI calculator is a tool that helps you calculate the monthly instalments that you would have to pay for your business loan. Numerous websites give you free access to business loan EMI calculators. A simple search on Google would take you to one.

Essentially what a business loan EMI calculator does is that it calculates the EMI by using the following formula:

E = P x r x (1 + r) ^ n / [(1 + r) ^ n – 1]

Where E stands for EMI, r stands for rate of interest that is being calculated monthly, P stands for the principal amount, and N stands for tenor that is calculated 84 monthly.

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