Interest rate is one of the most important parameters of a loan and can be considered as the deciding factor for any loan applicant. Funding is crucial for any small business as it aids in the scaling of the business. The business loan interest rates for funding comes not just as a one-time investment, often funds are required on a timely basis to maintain the cash flow of a business organization, to organize inventory or maintain a regular flow of payment cycles. Often times companies fail to raise a specific sum of money when they need it the most, it is during these times that the business loan comes in handy.

## Business loan interest rate calculator

Before one begins to raise capital, it is crucial to understand how the business loan interest rate is calculated in India. There are a number of financial institutions offering low-interest business loans.

The business loan interest rate is dependent on the amount of loan and the duration for which it is taken. The business loan interest rate in India is defined into two major categories:

(i) Diminishing or Reducing Rate of Interest

(ii) Flat Rate of Interest.

### Diminishing or Reducing Rate of Interest on Business loans

In a diminishing rate of interest business loan, the interest is not charged on the principal amount. You pay it on the outstanding amount. In this method, the interest amount keeps reducing every month.

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For example:  if you have taken a loan of 6 lakhs for 12 months at a diminishing rate of 5 per cent then this is how much will pay your bank: (fixed EMI = 50,000 per month)

1st month Interest: 5 per cent of Rs 6, 00,000 = Rs. 30,000

Total EMI amount for 1st month = fixed EMI amount + interest = Rs. 50,000 + Rs. 30,000 = Rs. 80,000

Outstanding loan amount after 1st month: Total loan – first EMI = Rs. 6, 00,000 – Rs. 50,000 = Rs. 5, 50,000

Now for the 2nd month, the interest will be charged on Rs. 5, 50,000

2nd month interest: 5 per cent of Rs. 5, 50,000 = Rs. 27,500

Total EMI amount for 2nd month: Rs. 50,000 + Rs. 27,500 = Rs. 77,500

Outstanding loan amount after 2nd month: Rs. 5, 50,000- Rs. 50,000 = Rs. 5, 00,000

Interest for the third month will be charged on Rs. 5, 00,000

## Flat Rate of Interest on Business loans

In this method, a fixed interest rate is levied on the principal loan amount. The rate of interest remains the same until the end of the loan term.

For example, you’ve taken a business loan of Rs. 6, 00,000 for 12 months with your EMI being Rs. 50,000 per month at an interest rate of 5 per cent per month. This is the amount of interest you will be paying on your loan amount:

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1st month interest: 5 per cent of Rs. 6, 00,000 = Rs. 30,000

Total EMI amount for 1st month = fixed EMI amount + interest = Rs. 50,000 + Rs. 30,000 = Rs. 80,000

The interest for the remaining months of loan term would be the same as the 1st month (Rs. 30,000), therefore, your EMI for the entire duration of 12 months will remain the same unlike the diminishing rate of interest method.

### Diminishing Rate of Interest vs. Flat Rate of Interest on small business loan

Flat Rate:
1. Interest is calculated on the principal amount of the loan.
2. The rate of interest is lower than reducing rate of interest.
3. Calculation of Flat rate of interest is easier than calculation of Reducing rate.

Reducing Rate of interest:
1. Interest rate is calculated on outstanding loan amount on a monthly basis.
2. Interest rate is quoted higher than Flat rate.
3.Calculation of interest rate may be complicated.
4. In terms of repayment Reducing rate is much better than Flat rate.

### Elements of Business loan Interest Rates

There are certain elements that determine Business Loan Interest Rates.

The business loan interest rate providing body will lay the risk of every business loan with low-interest rate application against a set of guidelines. Some of the common limit or boundaries which define the scope of this process are:

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• A small business loan with low-interest rates – For Small to Medium Enterprises in India, there are favorable chances of getting a business loan with a positive credit line score. The score assures a suitable business loan interest rate.
• Business loan interest rate calculator –  The interest rate calculation is based on a variety of factors like the number of years the firm has been in operation, the firm’s revenues, the firm’s future potential etc.
• Low-interest rate bank loan – A longer and stronger transaction history can earn a more competitive business loan interest rate.
• The interest rate for a business loan in India – In spite of eligibility, collateral needs to be often pledged as security. The more valuable the collateral, higher the loan amount and lower business loan interest rates can be negotiated. Collateral and a good banking history can go a long way in ensuring lower interest rates.

In addition to the interest, the lender may levy other business loan interest rate charges such as processing fees, stamp duty, Commission on Letters of Credit (LC) and Bank Guarantee (BG), foreclosure charges and other statutory charges.

## Business Loan Interest Rates from ZipLoan

ZipLoan offers collateral free loans to small businesses at very attractive rate of interest. ZipLoan charges a Flat rate of interest ranging from 12-18%.

The interest rate is calculated through ZipScore which takes into account banking history, financial transaction and credit history of the business.