The interest rate of a loan is always expressed in terms of percentage. But the Reserve Bank of India manages the amount of money to stay in the economy while dictating the business loan interest rate for any business. They help add the funds to the economy while lowering the rates as more and more companies could access it.
But before determining the rate of interest for any small business loan in India, the lender would check on the credit history and the type of loan you are looking forward to. A credit score tends to play a big role in determining the rate of interest. Especially when you have a good credit score, you can experience a lower interest rate. Check out these five ways how the rising interest rate impacts small business organizations in India.
- Increase in the repo rate
An increase in the repo rate can affect the interest rate. The repo rate is generally the lowest rate at which any financial institution lends money to its creditworthy borrowers. If the repo rate goes up, the rate of small business loans in India will also increase.
- Cash flow
A higher interest rate can also affect any small business organization that operates with limited cash flow. It can also make it harder for the business organization to acquire capital.
- Consumer income slows down
The higher rate of interest directly indicates the lower discretionary income. It means that the consumers would not buy the products or services like before. Hence, the business would suffer a decrease in its sales. Banks would also help decrease the number of loans while increasing the interest rates.
- Difficulties for getting the loan
The increase in the rate of interest affects the daily operation of small business organizations in India. If your interest rate increases, the long-term debt becomes an expensive affair. When the interest rate on your loan is variable, your loan can become quite expensive. It would take a long time for anyone to pay off a small business loan in India. Due to this reason, your cost of financing can increase while lowering your income.
The higher interest rate can also affect short-term loans and make them very expensive. It is quite difficult for any small business organization to meet such financial obligations, especially if any unexpected expenses come on the way. Businesses would be unable to deliver the services or products to customers if they have a cash flow deficit for continuous operation.
- It affects the business profit
As the business owner, you must be looking for capital that can help you expand your business operations. But with a higher rate of interest, you will be facing a higher capital cost. In addition, your operational costs would also rise. Moreover, the customers would have a lower discretionary income that would decrease the profit of your business.
The rate of interest fluctuates in accordance with the current economic condition of the country. Whenever the economy is strong, the interest rate is quite high. It means that the business loan would be more expensive than ever. But whenever the interest rates are lower, the choice lies with the lender whether they would approve the loan or not.
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