How do lenders decide the interest rate for my SME business loan?

CreditEnable_SME Business Loan

As a small business owner applying for an SME business loan, there are a few things you need to consider before you agree to the loan a lender is offering you. The interest rate is one such important aspect. To make an informed decision about your SME business loan interest rate, you need to understand how the lender reaches the final interest rate they offer you.

Let’s break down what an interest rate is and how lenders decide what rate to offer you.

What is an interest rate?

When you borrow an SME business loan from a formal lender, the amount you must pay back is made up of the original loan amount (the principal) and the interest rate they are charging you. The interest rate is a per cent of your loan amount. You can think of it as a fee that the lender charges you in exchange for lending you an SME business loan. Every EMI instalment you repay should be made up of a portion of the principal amount you borrowed + the interest amount you owe the lender.

EMI Amount = Principal Amount + Interest

When the lender approves your small business loan, they will tell you the loan amount they can offer you, for how long, and at what interest rate. If you opt to repay your loan based on a fixed interest rate, your EMI instalments will be the same throughout your loan repayment period. If you choose to repay according to a reducing interest rate, your EMI instalments become smaller as you repay your loan. 

What’s the difference between fixed and reducing interest rates?

How does a lender determine what interest rate to give me on my SME business loan?

The #1 factor that lenders base their interest rate calculation on is the risk associated with lending to you. Lenders perceive risk against your ability and willingness to repay the money they lend you on time.

Therefore, based on that logic, your business vintage (how long your business has been operational and registered) plays a key role in determining the risk associated with lending to you.

The older your business, the more thought out and tested your business plan is. You have had time to establish your business, adapt to the changes in the market, and you’re familiar with the challenges and opportunities associated with the sector.

Your business has had time to develop stable and regular cash inflows, making you a less risky business for a lender to lend to. So, you will be in a better position to navigate changes in the market compared to a newer business with a lower vintage.

Therefore, SMEs with a higher business vintage and legal proof of business registration to verify their business vintage are considered a less risky business for a lender than a younger one. And based on this, lenders are more likely to offer an older business a larger loan amount at a lower interest rate when compared to a younger SME.

How do I improve my chances of getting an SME business loan with a lower interest rate?

Lenders are more likely to offer you an SME business loan of a higher value if:

  1. You have a business vintage of 3 years or more.
  2. You own property.
  3. You have substantial collateral to offer the lender in exchange for the SME business loan.

These three conditions increase the loan amount lenders offer you and reduce the interest rate of the loan.

Conversely, if you don’t own property and rent your place of business or residence, your business vintage is 1 year or less, and you don’t possess any collateral to offer the lender, you may still be eligible for a business loan, though it will be an Unsecured Business loan of a lower value with a shorter loan tenure and a higher interest rate.

Learn more about Unsecured Business Loans.

Can CreditEnable help me get an SME business loan with an attractive interest rate?

At CreditEnable, we have over 25 lender partners to get our customers an SME business loan suited for their business needs.

Using our technology platform, you no longer need to go to multiple lenders with your business loan requirements. Just tell us about your business and business needs by registering on our platform and answering a few questions. Based on the information you provide us, we’ll check your business loan eligibility by doing a soft pull of your Experian credit score. If your business is eligible for an SME business loan with one of our lender partners right now, we’ll tell you what documents to send us.

Once we have your full application package ready, we’ll conduct a thorough assessment of your business and financial situation. Based on this, we’ll match you with an SME business loan product offered by one of our lender partners that is the best fit for your business needs.

Our lender partners offer Unsecured and Secured Business Loans, Working Capital Loans, Loans Against Property, Business Machinery Loans, Overdraft facilities, and Commercial Credit Cards to our SME customers.

Learn more about my SME business loan options.

We’ve helped our customers get SME business loans at interest rates starting at 14%, depending on factors such as their financial history, credit report, and business type. Once your loan application is approved, we’ll support you through the underwriting process and even work closely with our lender partner to help you get better terms for your SME business loan.

Start your application today.

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