Need to Reduce the Interest Rate on a Business Loan? Here are Some Basic Tips

01 Oct 2020

The basic human psychology states that one wants to take more and pay less, and practically in business, the owner always looks for the ways to reduce the repayment. Well, if you are also in the same queue and wondering to pay less against the business loan, then you have reached at the right place as here you will get the comprehensive information to minimize the interest rate against the business loan.

How to minimize the interest rate on a business loan?

Analyze the deciding factors of the interest rate

An interest rate is an additional charge imposed by the lender to the borrower against the business loan. The lenders always provide the low-interest loan to such borrowers who have an excellent rating in the business, and now you need to focus more on such factors.

Credit Score

The credit score plays a significant factor in reducing the interest rate on a business loan. If you have a good credit score and the scale is above 800, then there is an excellent possibility to avail the business loan at the lowest interest rate. However, if you have a bad credit score, then you may get the business loan at a higher interest rate. So, here you will have to build your credit score and for the same, clear all the pending dues and try to avoid taking excess loans.

Debt to Income Ratio

Debt to Income ratio is an analyzing tool used by the lender to decide whom to offer the business loan at which interest rate. If your ratio is low, then you will get the business loan at a lower interest rate. However, if Debt to Income ratio is higher than you will have to minimize it and for the same, you will have to increase the profit of the company and have to reduce the expenditure done on the business and also try to clear all the previous dues.

Collateral

An asset serves as a security tool to the lender, means if you have taken a business loan and failed to repay the amount, then the lender will have the right to seize your assets to recover the loan amount. So, collateral plays a dual role from both the end, i.e., one side can get the loan against the assets, and the other side may seize the same to recover its loan amount. Hence, if you have surplus assets, then you can get the business loan at the lowest interest rate.

Choose the right lender.

Various lenders offer the business loan at the different interest rate, and your job is to find out such lender who provides the business loan at a lower interest rate. In tradition way, you will find a bank and the same offer the loan at cheaper interest rate, but the bank retains various norms and conditions and if you fulfill the same then you can easily get the business loan at the lowest interest rate.

In modern days, various online lenders offer the business loan at different interest rate depending upon the collateral, credit score, and much more. If you meet all the requirements of the lenders, then you can easily avail the business loan at the lowest interest rate. However, some lenders offer the loan at a higher interest rate if you have a bad credit score or no collateral. So, it is upon you to choose the right lender who can provide the business loan at a minimal interest rate.

Repay the loan amount wisely

In the financial market, there are two types of interest rate, i.e., Simple Interest and Compound Interest. In the former, you will have to repay the principal amount inclusive of interest rate within a given period of time. For example: if you have taken a loan of $100,000 at an interest rate of 20% for a year, then you will have to pay back $120,000 within a year. 

However, in the case of compound interest rate, the interest is calculated on the remaining balance of the loan amount, including the previous dues. So, it is always recommended to repay the dues on time to get a further business loan at a low-interest rate.

Refinance your business debt

This is also an effective method to lower the interest rate on a business loan. If you have taken multiple loans for running a business at a higher interest rate, then you could cut all by taking a long-term business loan at a low-interest rate. However, if you have just started a business by taking a short-term business loan, then you can improve your chances of getting a loan-term business loan by clearing all the dues of the short term in a fixed period of time.

Business Plan

Your business model should offer a clear picture of the expenditure and the revenue generated. This will help the lenders to figure out the profit margin in a year and this will bring you much closer to the line of a business loan at a lower interest rate. Lenders want their money back and for that, they will look at all the aspects of your business and if found satisfactorily, then they can quickly provide you a business loan.

Business Age

If you are running a business for a longer period of time, then the probability of getting a business loan at a low-interest rate is higher because this builds up the trust on the lender that they will get their money back and your trustworthiness will help you to get the business loan at a low-interest rate. However, if your business age is less than 3 years, then chances of getting a business loan at a low-interest rate are quite impossible.

Hence, these were the key factors which can help you to avail the business loan at a low-interest rate. Now, the ball is in your court and you will have to play the game wisely. But make sure to maintain the trust of the lenders by clearing the dues on the time.