Whether it is a start-up or an ongoing business, funding is a necessary thing to look at. If we consider starting a business or increasing the present company, a huge amount of cash is required. For this, the government has introduced several loan schemes for small or medium businesses like MSME. If you are unaware of MSME, then MSME full form is Micro, Small, and Medium Enterprises. The government offers small assistance in loans to these small or medium enterprises with better interest rates.
If you have any plans for applying for loans under this scheme, then you should be aware of the factors that badly affect the interest rates of MSME loans, which we mentioned in the below section.
Bad Credit Scores
While taking any loan, the lender must trust the person or the business they are lending to. And this trust can only be determined by only one means, and that is by checking the credit score or credit rating. The credit score is determined by the records of the borrower that helps in developing the trust factor. Moreover, a person with better credit scores can easily get a loan at a reasonable or lower interest rate, while bad credit scores can affect the interest rates of the MSME loan. But, in a few instances, like for micro-businesses, the lender also considers the personal scores of the borrower.
Profit Margin Of Business And Business Financials
Lenders are ready to lend money if the repayment is assured, and this can also be determined by looking at the business’s financials or the business’s profit margin. Moreover, lenders choose or look for potential candidates who can timely repay their loans. Hence, any business with a better of these two can easily get a loan at lower interest rates. But, in case the above two aren’t satisfactory to your business, then you can see a hike in your interest rates.
Experience does matter in the field of business or while applying for a loan. Under the MSME schemes, anyone can apply for small business assistance, but the interest rates may vary depending upon the experience in the business. Older businesses are granted loans at lower interest rates, as they have already proven their way of doing business and dealing with credits. But, there is no specific evidence to prove their ability for a start-up, due to which they get loans with greater interest rates.
Lending works on the principle of security of money, and for which the lenders ask borrowers to deposit some collateral. In this factor, collaterals guarantee that the borrower will return the money within the loan period. And hence, any business that submits sufficient collateral to the lender gets the loan at a lower interest rate. At the same time, small or medium business loans approved without any collateral are demanded at higher interest rates. So, if you want the loan at a lower interest rate, then try submitting enough collateral to the lender.
While applying for an MSMEloan, MSME registration, mentioning the business model or the type of business is vital as the information will be used while approving the loan for your business. There are different types of business models, some of them are product-oriented, while some are service-oriented, but the loan is approved by seeing the risk factors of the business. A business with lower risk factors can get the loan at lower interest rates, while higher risk will be the reason for higher interest rates.
While checking the risk, the lenders also determine the growth prospects of the business. The MSME loan is offered at a lowered interest to those who show greater chances of growth in the upcoming future, and those business plans with minimal upcoming growth can get the loan at high rates. And this is why it is considered to get a business plan with bigger goals, which will benefit you in various sectors.
Lending a loan is very risky, which is why lenders check various factors before approving the loan. If the loan is approved, the interest rates also depend on those factors. So, it is required to fulfill most of the factors to get the loan at a minimal interest rate, which will be easier for repayment.