Fintech lenders with their technological platforms have disrupted the traditional lending channels. Thus, due to significant savings in costs from automation of processes, these NBFCs are in a position to offer unsecured business funding at lower interest rates than banking channels. This is another reason why the interest rates on unsecured business loans India vary from lender to lender.
Each NBFC has certain predetermined criteria based upon the satisfaction of which the business loan is extended to the loan applicant. The complete fulfillment of these conditions results in lower interest rates for the borrower and vice versa.
The following are the factors which influence the interest rates on unsecured business loans in India:
1. Credit Score
The lender is primarily concerned with the repayment capability of the borrower. Hence the credit score is one of the most crucial aspects that are looked into by the fintech lender to determine fundamental eligibility to obtain a business loan. This, in turn, impacts the interest rate. A minimum score of 700 is essential to be eligible for a business loan. In case of a healthy score of over 750, the business loan would be extended on favorable terms with lower interest charges. It must be noted that even an average credit score can get a business loan if the financial performance of the business is sound. However, the lender would charge a higher interest rate in such a case.
2. Vintage period
Many fintech lenders insist on a minimum business operating period of 3 years. However, in case audited financials of 2 years are produced, the loan may be granted to eligible borrowers. A relatively nascent business unit or a business in the fledgling stage is considered a risky entity by lenders as the business model is yet to be proved as being viable. Further, the unit might not have generated sufficient revenues to assure the lender of its repayment capability. Hence lenders may charge a higher interest from a new business. However, long tenure of operations does not guarantee a lower interest rate. The lender would look into the stability of turnover and profitability aspects.
3. Profits are vital
Regular and healthy profits are a winning point when it comes to obtaining a business loan at attractive interest rates. Ultimately profits are used to pay the EMIs on business loans. In the case of high-profit margins, the lenders would be willing to extend loans at discounted interest rates. Many NBFCs also mandate a minimum turnover limit of Rs 40 lakhs.
4. Business fluctuations
Every business undergoes business cycles i.e. ups and downs in profitability. However, some industries are prone to frequent volatility. The fintech lenders would study the markets conditions prevailing in the economy and the impact on the sector in which the business operates, before extending the business loan. This would naturally have a bearing on the interest rates.
If the market is excessively volatile, the interest rates would tend to increase, and if there is a probability of short or long-term stability, the interest rates would fall.
5. Assets matter
While unsecured business loans do not require collateral, it is advantageous to have a considerable asset pool. A significant asset base is a strong indicator of the viability and sustainability of the business model. The lender would be willing to extend loans of a higher amount and at lower interest rates to business units that boast of a decent asset pool.
6. Fixed vs. Variable Interest rate
Based on the credibility of the business and the promoters and the financial performance of the business, lenders extend financial assistance by way of unsecured business loans. The lender may offer fixed or variable rates based on the prevailing market conditions and borrower preference. In case of a favorable economic condition, a variable interest rate can help reduce borrowing costs significantly.
Fintech lenders make use of business analytics, machine learning, and cloud computing before arriving at the most suitable interest rate for each loan applicant.