Irrespective of the size of a company, a business loan plays a crucial role in implementing strategies to help a company prosper. However, before applying for a business loan, it is crucial to investigate all the expenses associated with it.

Here is a list of the costs that you might incur throughout the process:

 

1. Interest Rates

Financial solutions come with interest rates that are charged by the lending institutions as a cost for providing funds to the borrowers. Although interest rates are considered one of the common costs associated with business loans, the rates tend to vary from one financial institution to another. The type of business loan also determines the amount of interest rate imposed on a borrower.
 

Factors Affecting Interest Rates on Business Loans:

a) Credit Score

The credit score showcases the reliability and the loan repayment capabilities of a borrower. A high credit score helps businesses to negotiate for favourable interest rates. On the other hand, a low score may burden them with high interest rates. A credit score above 700 by CIBIL or similar credit rating agencies is preferable.

b) Business Vintage

Businesses with a vintage of 3 years may avail funds at better interest rates. Start-ups exhibiting less business experience may have to pay relatively higher interest rates depending on the loan type and the business profile of the borrowers.

c) Annual Turnover

The annual turnover of an organization plays a vital role in determining the interest rate associated with the loan. It depicts the yearly income of a company and highlights the loan reimbursement capability of a borrower.

d) Profit and Revenues

The profit margin and revenues are taken into account while considering the rate of interest to be imposed on the borrower. These help lenders assess the financial health of the borrowers and reflect the growth potential of their companies. The profit margins and revenue help lenders determine whether borrowers have sufficient money to repay the loan or not.

e) Collateral

Secured business loans often require enterprises to avail the funds with some kind of collateral. Collateral can be material or non material in nature. Material assets usually comprise property, equipment and inventory. onmaterial assets usually comprise patents and accounts receivables. By utilising the assets, companies can arrange funds at favourable interest rates without disrupting their financial stability and cash flow.

2. Processing Fees

It is charged by the financial institution during the disbursement of the loan. The fees cover all the expenses related to the loan application process – from its approval to the final stage of loan disbursement. The processing fee for business loans differs from lender to lender.

3. Documentation/Login Fees

Borrowers are often required to pay documentation fees to facilitate the loan approval processes. The fees are charged to thoroughly evaluate the submitted documents like address proof, CIBIL score, proof of identity, and the citizenship of India before approving the loan application form.
 

Other Charges

Apart from the processing and documentation charges, a lender may also impose the following charges:

1. Prepayment Charges

Prepayment charges are imposed on the borrowers when they choose to pay off their debts before the scheduled repayment term. This is to compensate the lender for the loss of interest associated with early debt clearance. The charges differ based on the category of the business loan and the policies of the lenders.

2. Late Payment Charges

Borrowers may be penalized if they fail to make timely repayment of the loan amounts. Failure to repay the loan on scheduled dates may attract late payment charges. This can potentially increase the overall sum of money that the borrower has to repay.

3. Cash Collection Charges

These charges are associated with the processing and management of cash transactions. The charges are imposed when a borrower repays funds in the form of cash to the collection agents appointed by a lender. The charges tend to vary depending on the amount of money collected by the lenders.

4. Bounce Charges

These charges are applicable when a borrower’s cheque/NACH payment for loan reimbursement bounces. This happens when the borrower’s bank account has insufficient funds for making the payment.

5. Stamp Duty

Stamp duty charges ensure that the borrower’s documents gain legal status in court. The charges tend to vary depending on the geographical jurisdictions, the category of the business loan, and the amount of loan availed by the borrower.

6. Annual Maintenance Charges

Lenders impose annual maintenance charges for handling a borrower’s loan account. The charges vary based on the loan amount and the category of the business loan.

7. Switch Fees

These may be charged when a borrower wishes to switch from one lender to another. The fees are calculated based on the loan amount and differ from lender to lender.
 

Before applying for a business loan, a borrower must understand the fees associated with the loan application procedures. Additionally, knowing the role of the Average Bank Balance (ABB) in Business Loans is equally vital, as it often influences the loan approval process, interest rate and terms. It is essential to maintain a healthy credit score and annual turnover, as these factors can directly impact the interest rates associated with financial solutions.

At Arka, we offer loans at favourable interest rates and zero documentation fees. We maintain the utmost transparency while dealing with the processing charges, and other costs associated with our tailored business loans.