Securing a business loan can be a pivotal step for growth. But it’s very important to understand the interest rate is crucial before signing any agreement. Interest rates vary widely based on factors like creditworthiness, loan type, and lender policies. They directly impact your repayment amount.

Are you trying to expand the operations, purchase new equipment, or manage cash flow? Then knowing how rates are determined helps you make informed financial decisions.

This blog breaks down the interest rates on a business loan. And by the end, you’ll be able to choose the best business loan with respect to the interest rates and repayment options. Let’s begin.

Best Interest Rates on a Business Loan

The interest rates may vary across lenders, so it’s important to compare the offers and options and choose accordingly.

Loan Lender (Bank or NBFC)Interest Rates
HDFC Bank10.50% to 15% p.a.
Axis Bank11.50% to 19% p.a.
ICICI Bank16% p.a.
Kotak Mahindra Bank11.75% to 13% p.a.
IDFC First Bank11.18% to 15% p.a.
Tata Capital13.50% to 26% p.a.
L&T Finance15% to 19% p.a.
Aditya Birla Finance24% to 30% p.a.
Muthoot Fincorp28% p.a.
Shriram Finance21% to 22% p.a.

The interest rates for business loans are charged at the sole discretion of the lending party, i.e. the bank or NBFC. But of course, interest rates aren’t the only thing you should consider—there are several highlights you need to consider. Like, repayment terms, loan tenure, loan amounts, and more.

Plus, the interest rates may differ based on whether you opt for unsecured business loans or secured ones.

Eligibility Criteria for Business Loans

Before approving a business loan, lenders assess multiple factors to determine if you qualify. Key eligibility criteria typically include:

  • Credit Score: A strong personal and business credit score (usually 650+) improves approval chances.
  • Business Age & Revenue: Most lenders require at least 6 months to 2 years in operation with steady revenue.
  • Debt-to-Income (DTI) Ratio: A low DTI (ideally below 40-50%) signals repayment capacity.
  • Collateral: Secured loans may need assets like property or inventory as backup.
  • Business Plan & Financial Statements: Banks often review cash flow projections, balance sheets, and profit-loss statements.

Understanding these requirements helps you prepare a stronger application and secure better loan terms.

Documents Required for Business Loans

When applying for a business loan, a lender will need a few documents to assess your creditworthiness and financial stability. Readying these docs beforehand will speed up the approval and improve your chances of funding.

Let’s look at these documents.

Business Proof

  • Business registration/license (GST, Udyam, or MSME certificate)
  • Partnership deed or MOA & AOA (for companies)
  • Shop & Establishment Act certificate (if applicable)

Financial Statements

  • Bank statements (last 6–12 months)
  • Audited/provisional balance sheets & P&L statements (last 2–3 years)
  • Income tax returns (business & personal, last 2–3 years)

Identity & Address Proof

  • PAN card (business & owner)
  • Aadhaar card, passport, or driver’s license
  • Utility bills or rental agreement (business address proof)

Loan-specific Documents

  • Loan application form (lender-provided)
  • Business plan (for startups or large loans)
  • Collateral documents (property papers, asset details for secured loans)

Check with your lender if you need any additional requirements. It’ll be based on loan type and amount. Be advised that unsecured business loans won’t require collateral documents.

Government Business Loan Schemes with Low Interest Rates

Whether you’re an entrepreneur or run an MSME, the Indian government offers several loan schemes with subsidized interest rates. The aim of these initiatives is to boost business growth, support startups, and enhance financial inclusions. Let’s look at a few top options.

Pradhan Mantri Mudra Yojana (PMMY)

Under PMMY, entrepreneurs can access loans up to ₹10 lakh under three categories: Shishu (up to ₹50,000), Kishore (₹50,001–₹5 lakh), and Tarun (₹5–₹10 lakh). Designed for micro-units and startups, this scheme supports non-farm income-generating activities. It includes everything from street vendors to small manufacturers.

No collateral is required, and interest rates start as low as 8.50% p.a., making it ideal for first-time borrowers.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

CGTMSE enables micro and small enterprises to secure loans up to ₹2 crore without pledging assets. The government guarantees 75–85% of the loan amount, reducing lender risk. Eligible businesses in manufacturing or services can access term loans or working capital at competitive rates (starting around 10% p.a.). Ideal for scaling operations or purchasing equipment.

Stand-Up India Scheme

Stand-Up India is focused on promoting diversity in entrepreneurship. It offers loans from ₹10 lakh to ₹1 crore for greenfield projects in manufacturing, trading, or services. At least one woman or SC/ST borrower per bank branch benefits, with 75% funding for project costs.

Interest rates are competitive (linked to MCLR), and repayment spans up to 7 years.

Prime Minister’s Employment Generation Programme (PMEGP)

PMEGP combines loans with subsidies (15–35% of project cost) for new micro-enterprises. Individuals can borrow up to ₹25 lakh (manufacturing) or ₹10 lakh (service sector) at minimal effective interest rates, thanks to government grants. Khadi and village industries often get priority with this.

SIDBI Make in India Soft Loan Fund for MSMEs (SMILE)

SIDBI’s SMILE scheme provides quasi-equity and term loans up to ₹1 crore to MSMEs at soft interest rates (starting at 8.75% p.a.). Tailored for technology upgrades, export readiness, or energy efficiency, it also offers longer tenures (up to 10 years).

Credit Linked Capital Subsidy Scheme (CLCSS)

CLCSS helps MSMEs modernize by subsidizing 15% of machinery costs (up to ₹1 crore). Loans are available via scheduled banks at regular rates, but the subsidy reduces the effective burden. Covers 51 sub-sectors, from food processing to textiles.

These schemes help reduce borrowing costs while encouraging business expansion. Check eligibility and compare lenders for the best terms.

FAQs on Business Loan Interest Rates

  1. What factors determine the interest rate on a business loan?

    Lenders set interest rates based on your credit score, business financials, loan amount, repayment tenure, collateral (if any), and overall market conditions. Established businesses with strong revenue and good credit typically get the lowest rates.

  2. Fixed vs. floating interest rate—which is better?

    Fixed rates keep EMIs predictable, ideal for long-term stability. Floating rates fluctuate with market changes, potentially saving money if interest rates drop. Choose based on your risk tolerance and market outlook.

  3. Can I negotiate my business loan interest rate?

    Yes—strong credit, consistent revenue, or an existing relationship with the lender can help you negotiate better terms. Comparing offers from multiple lenders also strengthens your bargaining position.

  4. Are processing fees part of the interest rate?

    No, processing fees (usually 0.5%–2.5% of the loan amount) are separate, one-time charges. They don’t affect the interest rate but add to the total loan cost.

  5. Do NBFCs offer lower interest rates than banks?

    Not usually. NBFCs often charge higher rates but compensate with faster approvals, flexible eligibility, and easier documentation compared to traditional banks.

Final Thoughts

You need to understand the business loan interest rates to make smarter financing decisions for your company. You can opt for a secured or unsecured loan and a fixed or floating rate. The right choice depends on your business needs, financial health, and risk appetite.

Always compare lenders, read the fine print, and negotiate terms where possible to secure the best deal. Remember, the lowest interest rate isn’t the only factor—consider processing fees, prepayment penalties, and repayment flexibility.

Ready to explore options? Start by checking your eligibility and check out our financing options today!