Why Do Businesses with the Same Loan Get Different Interest Rates?

When two businesses apply for the same loan amount, it’s not uncommon for them to receive different interest rates. This discrepancy often leaves borrowers wondering why their loan terms differ despite applying for the same amount. The answer lies in the lender’s risk assessment process. Lenders evaluate multiple factors to determine the interest rate, and even small differences in these factors can lead to significant variations in loan pricing. 

As a Chartered Accountant (CA), I’ve seen first hand how businesses can optimize their financial profiles to secure better loan terms. 

Let’s break down the key factors that influence interest rates and how businesses can position themselves for favorable terms.

1️⃣ Credit Score & Repayment History

A business’s credit score is one of the most critical factors in determining loan interest rates. Lenders view a high credit score (750+) as an indicator of financial discipline and reliability. Businesses with strong credit scores are often rewarded with lower interest rates. On the other hand, late payments, defaults, or a history of missed EMIs signal higher risk, leading to higher rates.

Pro Tip: Regularly monitor your business credit score and ensure timely payments of all dues. A strong repayment history can significantly improve your chances of securing better loan terms.

2️⃣ Cash Flow & Business Stability

Lenders assess a business’s cash flow to gauge its ability to repay the loan. Consistent revenue streams and stable financials indicate lower risk, which translates to lower interest rates. Conversely, businesses with fluctuating income or irregular cash flow are perceived as riskier, resulting in higher rates.

Pro Tip: Maintain steady cash flow by managing receivables efficiently and filing GST/income tax returns on time. Strong financial statements can also simplify the loan approval process.

3️⃣ Secured vs. Unsecured Loans

The type of loan you opt for plays a significant role in determining the interest rate. Secured loans, which are backed by collateral (such as property, stock, or fixed deposits), typically come with lower interest rates because they reduce the lender’s risk. Unsecured loans, which lack collateral, are riskier for lenders and thus carry higher interest rates.

Pro Tip: If possible, offer collateral to secure better loan terms. This can significantly reduce your interest burden.

4️⃣ Loan Tenure & Amount

The duration of the loan and the amount borrowed also impact the interest rate. Shorter tenures generally come with lower interest rates but higher EMIs, while longer tenures may have slightly higher rates but lower EMIs. Lenders often adjust rates based on the perceived risk associated with the loan’s duration.

Pro Tip: Choose a balanced loan tenure that minimizes your total interest cost without straining your cash flow with excessively high EMIs.

5️⃣ Industry & Risk Factor

The industry in which your business operates can influence the interest rate you receive. Low-risk industries, such as IT and pharmaceuticals, are often offered lower rates due to their stable revenue streams and growth potential. High-risk sectors, such as hospitality or startups, may face higher rates due to the inherent volatility and uncertainty.

Pro Tip: If you operate in a high-risk sector, focus on demonstrating financial stability, revenue diversity, and growth potential to negotiate better terms.

6️⃣ Relationship with the Lender

Your existing relationship with the lender can also impact the interest rate. Businesses with a long-standing relationship and a history of timely repayments are often offered preferential rates. New borrowers, on the other hand, may face higher scrutiny and higher rates.

Pro Tip: Build strong relationships with your bank or lender. A good track record can help you negotiate better rates and terms.

Final Takeaway: How to Secure the Best Loan Rate

To secure the most favorable interest rates, businesses must focus on improving their financial profile and reducing perceived risk. Here’s a quick summary of actionable steps:

1. Improve Your Credit Score: Maintain financial discipline and ensure timely payments to boost your credit score.

2. Show Stable Cash Flow: Demonstrate consistent revenue and strong financials to reassure lenders.

3. Offer Collateral: If possible, provide collateral to reduce the lender’s risk and secure lower rates.

4. Compare Lenders: Don’t settle for the first offer. Compare multiple lenders and negotiate terms based on your financial standing.

5. Build Relationships: Cultivate strong banking relationships to leverage your repayment history for better rates.

Conclusion

As a CA, I often advise businesses to view loan applications as an opportunity to showcase their financial health. By understanding the factors that influence interest rates and taking proactive steps to optimize their financial profile, businesses can secure better loan terms and save significantly on interest costs. Remember, a smart borrowing decision today can save you lakhs in the long run. Focus on maintaining financial discipline, building strong relationships with lenders, and presenting a stable, low-risk profile to unlock the best loan rates for your business.