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What Are The Types Of Business Loans? Know The Type Of Interest Rates, Fees & Charges Of A Business Loan

Types of Business Loan and Its Fees & Charges

Money is the fuel that runs a business: Be it small enterprises or large corporate behemoths; funding is required to run business operations and ensure profits. Either a business is self-funded or externally funded.

In self-funded businesses, the existing revenues and funds from family/relatives are sufficient for running a business. But when it comes to externally funded businesses, then business loans and debt are the leading funding sources.

This article will discuss everything about the types of business loans and the different types of fees and charges for a business loan in India.

We will also share information on business loan interest rates and give a brief on the technical terms of the lending world, such as business loan fees and loan processing fees. We will also cover what loan foreclosure charges, prepayment charges, loan cancellation charges, and commitment charges are.

And at the end, will share how your business can avail instant help and guidance for deciding the best business loan and how to avail it.

So, let’s begin the journey and get more information on the business loans.

Types of Business Loans in India

Before we understand the business loan interest rates, first let’s get an overview of the types of business loans available in India:

Each of these loans has different terms and conditions for the business loan interest rate, loan processing fees and prepayment fees, and other charges.

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Different Types of Business Loan Fees & Charges

An overview of the various business loan fees, surcharges, and charges associated:

1. Loan Processing Fees

Loan processing fees, also called application fees, are among the most common business loan fees or administration charges levied on the lenders’ total loan amount.

Loan processing fees are usually between 1-3% of the total loan amount.

2. Prepayment Charges or Loan Foreclosure Charges

The borrowers pay prepayment charges or loan foreclosure charges if they decide to repay the entire loan amount before completing the loan tenure.

RBI has ordered zero prepayment charges, as per a 2014 notification, for term loans based on the floating interest rate. For other loans, 2-5% loan foreclosure charges are usually applied.

3. Conversion Charges

If the borrower decided to convert a loan from a fixed interest rate or a floating interest rate-based loan, or vice versa, then there is a provision of conversion charges paid by the borrower to the lender.

4. Commitment Charges

Some lenders provide overdraft facilities to the borrowers. And a limit is set for these overdraft charges, say 25% of the credit limit.

In case the utilization of the overdraft charges falls below this limit, then the borrower will be asked to pay commitment charges for the underutilized credit limit of the overdraft facility.

5. Loan Cancellation Charges

In case a loan is canceled (not repaid), then there are loan cancellation charges applicable on the total loan, which is canceled. Generally, the borrowers have no loan cancellation charges for a small amount, but if large amounts of loans are canceled, loan cancellation charges are generally applied.

In the next section, we will discuss more on business loan interest rates applicable in India for businesses and corporates.

Types of Business Loan Interest Rates

There are two types of business loan interest rates applicable when a lender sanctions a loan to the borrower:

  • Fixed Interest Rate – In the fixed category of loan, the interest rates are fixed for the loan’s entire tenure.
  • Floating or Diminishing Rate – The business loan interest rate keeps on varying and changing in the floating rate category, based on several factors.

For example, in the diminishing category, the interest rates decrease as the borrower starts loan repayment. It’s beneficial for the borrower since he/she is only paying interest on the remaining loan amount, not the entire loan amount.

The business loan interest rate keeps on fluctuating in the floating category, based on the market conditions, and the sometimes demand and supply.

Both fixed and floating interest rates have their benefits and disadvantages. In case the floating rates are below the fixed rates, they are always preferred since the loan repayment becomes easier. However, if the market fluctuations are intense, the borrower may pay more interest and more fees.

The rate of interest for business loans in India varies from 11% to up to 20% in some cases, depending on the banks and financial institutions. The borrower’s credit history and the business’s current financial position are essential factors in determining the final rate of interest that the lender will determine.

What are Franking Charges?

Franking charges are different from business loan fees, and it applies in the case of home loans. Franking charges are the financial institution’s fees, which is sanctioning a home loan for a borrower. It’s a charge for stamping the property papers once a home loan has been dispersed.

Hence, by imposing franking charges, the lender has legal evidence of paying the stamp duty and other associated taxes for a home loan.

Franking charges range from 0.1% to 0.2% of the transaction value of the home loan. Different states have different franking charges, and in some states, it’s capped as well. In some states, the franking charges can be offset by the overall stamp duty paid.

A small business or MSME looking for more information and guidance for taking a business loan, then financial experts & advisors at MSMEx can help you right away.

MSMEx is an MSME education and advisory platform, connects entrepreneurs with business leaders and industry experts. Once you connect with the experts, you can have a live interaction with them and get all the information & knowledge you seek on the go. Give a boost to your business ideas and vision right away!

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