Factors Affecting Business Loan Interest Rates

When a business owner applies for a business loan, lots of questions arise, and the first question that usually comes to mind is – How much interest will I pay on the loan amount?
And honestly, that’s a very valid question. 

Business loan interest rates are not random. They are decided after checking multiple things related to your business and financial behavior. Many business owners feel confused when they see different interest rates offered to different people, even for the same loan amount. 

In this blog, we’ll explain what factors affect business loan interest rates, in very simple words, so by the end, you’ll know exactly what impacts your loan cost and how you can get a better interest rate. 

What Is a Business Loan Interest Rate? 

A business loan interest rate is the extra amount you pay to the lender for using their money. It is usually charged as a percentage on the loan amount and can be calculated monthly or yearly. 

For example, if you take a loan of ₹10 lakh at 14% interest, you will repay the principal plus interest over the chosen tenure. Lower interest means lower EMIs and less burden on your cash flow. 

Factors Affecting Business Loan Interest Rates 

Credit Score 

Your credit score is one of the biggest deciding factors for your business loan interest rate. 

In India, credit scores usually range from 300 to 900. This score shows how disciplined you have been with past loans and credit cards. Have you paid EMIs on time? Have you defaulted? Have you used too much credit? 

If your credit score is above 750, lenders see you as a responsible borrower. This often results in lower interest rates and better loan terms. If your credit score is low, the lender feels there is a higher risk of delay or default. To compensate for this risk, they charge a higher interest rate. 

Example:
Two shop owners apply for a ₹5 lakh loan. One has a credit score of 780, the other has 620.
The first may get a loan at 12%, while the second may be offered 18%. 

Business Vintage (How Old Your Business Is) 

How long your business has been in the long run has also played an important role. 

A business that has been operating successfully for several years is considered more stable. It has already faced market ups and downs and survived. Lenders trust such businesses more. New businesses or startups usually have limited financial history. Because of this uncertainty, lenders often charge higher interest rates. 

If your business is older than 3 years, you generally have better chances of getting a loan at a competitive interest rate. 

Business Financials and Turnover 

Your sales, profits, and bank statements show how strong your business is financially. 

Lenders check your bank statements, sales figures, GST returns, and profit margins. If your business shows consistent turnover and stable profits, lenders feel confident that you can repay the loan on time. 

On the other hand, if your income is irregular or profits are very thin, the lender may increase the interest rate to cover the risk. 

Simple logic: Stronger business = lower risk = better interest rate. 

Even small improvements in financial reporting and regular banking activity can help you negotiate better terms. 

Type of Business 

The nature of your business also impacts the rate. 

Some businesses are considered safer, like retail stores, manufacturing units, or service-based businesses. Others, like seasonal or high-risk industries, may attract slightly higher interest. 

Lenders assess how stable and predictable your business income is before finalizing the rate. 

Loan Amount

The loan amount you choose also impacts the interest rate. 

A higher loan amount increases the lender’s exposure. In some cases, this can result in a slightly higher interest rate, especially if the business profile does not strongly support the amount requested. 

However, if your business financials are strong, a higher loan amount may help you negotiate better rates due to economies of scale. 

Choosing the right loan amount based on actual business needs is always smarter than borrowing more than required. 

Loan Tenure 

Loan tenure refers to how long you take to repay the loan. 

Shorter tenure loans usually carry lower interest rates because the risk period is smaller. However, EMIs are higher. Longer tenure loans reduce EMI pressure but may come with slightly higher interest rates and higher total repayment. 

The best option is a balanced tenure where EMIs are comfortable, and interest costs remain reasonable. 

Type of Lender 

Different lenders have different risk appetites. 

Banks usually offer lower interest rates, but they have strict eligibility criteria and longer approval timelines. NBFCs and digital lenders offer faster approvals, flexible documentation, and customized loan options. Interest rates vary based on your business profile rather than just rigid rules. 

Choosing the right lender is crucial. The cheapest interest rate is not always the best option if the process is slow or complicated. 

Why Choose TallyCapital for a Business Loan? 

Finding a business loan should not feel overwhelming. That’s exactly why TallyCapital exists. 

TallyCapital understands the real challenges faced by Indian small business owners. Instead of judging your business only on paperwork, they focus on your actual business performance. 

With TallyCapital, you don’t have to run from one lender to another. You get access to multiple lender offers that are suited to your credit profile and business needs. 

The process is simple, transparent, and quick. Documentation is minimal, approvals are faster, and there are no confusing surprises. 

Most importantly, it works to help you secure the best possible interest rate, not just any loan. 

Whether you need funds for expansion, inventory purchase, working capital, or cash flow support, TallyCapital makes the journey smooth and stress-free. 

Conclusion 

Business loan interest rates are influenced by many factors, not just one score or any document. 

Your credit score, business stability, financial performance, cash flow, loan requirement, and lender choice all come together to decide how much interest you will pay. 

The good part is that many of these factors are within your control. Improving financial discipline, maintaining proper records, and choosing the right lending partner can significantly reduce your borrowing cost. 

A business loan, when taken wisely, can fuel growth instead of becoming a burden. Understanding interest rates is the first step in making the right decision. 

FAQs 

1. What is the average business loan interest rate in India?
   Business loan interest rates in India generally start from around 11% and can go up to 24%, depending on the lender and borrower profile. 
2. Can I get a business loan without a high credit score?
   Yes, it is possible. However, interest rates may be higher. TallyCapital helps to match your profile with suitable lenders. 
3. Does GST file impact interest rates?
   Yes. Regular GST filing shows consistent business activity and improves lender confidence. 
4. How can I lower my business loan interest rate?
   Maintain a good credit score, keep financial records clean, choose the right loan amount and tenure, and apply through a trusted platform like TallyCapital.