Micro, small and medium enterprises (MSMEs) make up the vast majority of businesses in India. Like all businesses, SMEs too need loans from time-to-time to meet their financial requirements.
There are many different types of loans, namely machinery loan, term loan, working capital loan, that businesses take to expand, satisfy operational costs or buy specialized machinery. All these loans come under the ambit of SME loan. These are offered by various financial institutions at different interest rates.
However, since every business owner wants to avail a loan a low interest rate, they must meet certain requirements. So, let’s take a look at some of the factors that can help them do that.
Credit Score
One of the first and most important aspects you need to consider is your credit score. It is an indicator of your creditworthiness as determined by the leading credit rating agencies.
Four factors are taken into account to determine the credit score -your past loans, the total amount of loan you have taken, your repayment history, and missed payments, if any. Both individuals and businesses are given a credit score in India.
This is done with the intention of making it easier for lenders to assess a borrower’s creditworthiness. So, whenever you approach a financial institution for an SME business loan, one of the first aspects they will check is your credit score.To get a low-interest rate, you need to make sure that it is good. Otherwise, your other option would be a secured loan.
Debt to Income Ratio
The second factor that is taken into account by financial institutions when you approach them for SME business loan is your debt to income ratio. If your debt to income ratio is high, it indicates to the lender that your business is primarily being financed through loans, and not on your revenue.
A high debt to income ratio also takes into account the number of times you have applied for business loans in the past, and if that is high, it indicates that your business is in desperate need of cash.
Thus, the risk of extending you credit is high. So, if you want an SME business loan with a low-interest rate, you need to make sure that your debt to income ratio is low, or simply stop yourself from applying for too many business loans.
Do Your Research
In India, there are multiple lenders, who specialize in rendering small business loans. All have different eligibility requirements and different rates of interest on their loans.
So, if you want to get an SME loan with a low-interest rate, it is important that you research well and settle on a lender, who not only suits your requirements but also gives you the lowest interest rate.
Tenure of Your Loan
SME business loans in India generally come with a tenure of 5 to 10 years. When you do your research on lenders who offer SME loans, one aspect you will quickly realize is that the longer the tenure of your loan, the higher will be the interest rate.
The reason being, for a loan with longer tenure, the loss ratio of the lender drastically increases, meaning that there is a chance that you will default on the loan.
As a countermeasure, the lender increases the interest rate, so that even if you default, the lender would have recovered a significant amount already. So, in order to get the best interest rate, make sure you choose a loan with a shorter tenure or duration.
Conclusion
One of the best ways of getting a low-interest rate on your SME business loan is to negotiate with the lender. The better you negotiate, the lower your interest rate will be. So, go ahead and follow the above-mentioned tips to secure the SME business loan at a low-interest rate.
