Setting the foundation of a business is easy; running it successfully is not. After all, a businessperson knows, first hand, the significance of money in making a business stand out. A business loan is the easiest and quickest loan businesspersons avail when they require cash to buy equipment or machinery, meet working capital requirements, pay salaries, consolidate debt, or any other purpose related to their business.

The reasons for the popularity of business loans are myriad. Firstly, business loan interest rates are lower than many other loans. Secondly, business loans require minimal documentation and get approved quickly. Thirdly, borrowers can avail tax benefits on the interest component of the EMI. Fourthly, repaying the EMIs on time increases the creditworthiness and improves the borrower’s credit score. Must check and compare the Business loan interest rates of different lenders before applying. Check out Interest Rate Here

There are of two types business loan available in India- fixed and floating. Borrowers often get confused between the two while applying for a business loan.  

This article will give you an overview of fixed and floating rates of interest so that you can select the right type while availing a business loan.

What is Fixed Rate of Interest?

The fixed rate of interest remains precisely the same throughout the term of the loan. The rate of interest depends on your creditworthiness, which includes the credit score, monthly income, fixed liabilities, net debt, and income stability.

What are the Advantages and Disadvantages of Fixed Interest Rate?

Interest rate is a dynamic thing, which means very few people can predict its downward or upward movement, as it depends on a large number of macro and microeconomic factors. The fixed interest rate acts as a cushion against market fluctuations and hence makes it possible for you to plan your expenses accordingly. The fixed rate of interest suits those borrowers who like certainty in their business loan EMIs. It is often the preferred choice for less-aggressive borrowers.

However, by choosing the fixed rate of interest, you have to forego the benefits that the downward revision of interest rates offer. For example, business loan interest rates, at present, are hovering near its multi-year lows, and borrowers who opted for a fixed rate of interest a few years ago are still paying higher EMIs.

What is Floating Rate of Interest?

The floating or variable rate of interest goes up or comes down according to the market rates. The Reserve Bank of India usually decides the market rates and financial institutions are obligated to follow the rates. Hence, whenever the RBI decides to increase the interest rates, lenders increase the rates and vice versa.

What are the Advantages and Disadvantages of the Floating Interest Rate?

First thing first, the floating rate of interest suits those borrowers more who do not mind taking risks. Hence, the interest rate might be 15% at the time of loan application, and two years later, it might drop to 13% or increase to 17%. The more the risk, the higher are the chances of rewards.

The top advantage of the floating interest rate is that it can help you to save money if you can analyse the market like an expert. If you feel the interest rate are projected to come down, you may opt for the floating interest loan.

The second benefit of the floating rate is that the interest rates are usually up to 2% lower than the fixed rate of the same tenure. Hence, by opting for the floating-rate loan, you can save money. However, the threat of an increase in the rates after a particular time remains.

Despite the benefits, there are certain demerits of the floating interest rate. The first demerit is the varying of EMIs, which can spoil your plans of budgeting. In the worst case, you will have to pay more than you have budgeted for, as the lenders often pass off the rising interest to the customers very quickly.

Conclusion

Both fixed and floating rate of interest has their own merits and demerits. The type of interest rate you select should depend on your budgeting strategy, loan term, and risk-taking abilities. Most prudent borrowers choose the flexible rate when the loan term is short. However, for a long-term business loan, they prefer the fixed rate of interest.