The Micro, Small, and Medium Enterprises (MSME) sector is a powerhouse of the economy, driving growth and creating employment for millions. It contributes to around 30% of the country’s GDP, but individually, MSME businesses often operate on a fairly tight budget. Often having a limited amount of capital in hand also means they can’t invest in expansion plans or buy expensive equipment required to stay competitive in their industry.
One solution to this, that many MSMEs are turning to, is to take a business loan to finance expenses and growth. While traditional lenders like banks are known to steer clear of lending to MSMEs without collateral, some fintech NBFCs in this space have devised ways to provide them with the credit they need. Kinara Capital, which is an RBI-registered fintech NBFC, employs proprietary Al/Ml-led decisioning to provide MSMEs with collateral-free business loans through a completely digital process.
Factors Influencing MSME Loan Interest Rates
Several elements impact the interest rates on MSME loans, making it essential for business owners to understand these factors before applying. Key considerations include:
- Credit Score: Lenders assess the applicant’s creditworthiness. A higher credit score often results in a lower interest rate.
- Loan Amount: The risk perceived by the lender influences the interest rate, meaning larger loan amounts may come with higher rates.
- Loan Tenure: The duration of the loan affects the interest rate, with longer repayment periods sometimes leading to increased rates.
- Collateral: Loans backed by collateral generally have lower interest rates since they reduce the lender’s financial risk.
Understanding how MSME loan interest is calculated is equally important, as it helps business owners estimate the total cost of borrowing. Interest rates vary based on financial institutions and loan schemes, so comparing different options before finalizing a loan is crucial for effective cost management.
Check Current Rates and Apply
Business loan interest rates are a crucial factor in determining what your EMI amount will be. Interest rates that MSME loans vary from lender to lender. Kinara Capital offers business loans in the range of Rs. 1 lakh to Rs. 30 lakhs, completely free of collateral. The loan interest rates start at 24% and are calculated on a reducing rate basis, which results in lower EMIs with each repayment. Depending on the nature of the loan, the tenure can range from 6 months to 5 years.
You can avail of a Machinery Loan to finance the purchase of new or used machines, in order to scale up your production to improve the quality of your output. You can also opt for a Working Capital Business Loan to cover the day-to-day expenses of your business or fuel your expansion plans. Before taking a loan, make sure you understand the interest rate that will be applicable, the tenure of your loan, and the EMI you will be required to pay.
How to Calculate EMI for MSME Loan?
The Equated Monthly Installment (EMI) formula helps determine the repayment amount using an MSME Loan Calculator:
EMI = [P × R × (1+R)^N] ÷ [(1+R)^N-1]
Where:
- P = Loan Amount
- R = Monthly Interest Rate (Annual Rate12×100)\left(\frac{\text{Annual Rate}}{12 \times 100}\right)(12×100Annual Rate)
- N = Loan Tenure (in months)
Example Calculation
For a loan of ₹5,00,000 with an annual interest rate of 12% (which converts to a monthly rate of 1%) and a tenure of 24 months:
EMI= 5,00,000×0.01×(1+0.01)24(1+0.01)24−1
The estimated EMI for this loan amounts to approximately ₹23,537.
By understanding the EMI calculation and key factors influencing MSME loan interest rates, borrowers can better assess their repayment commitments and select a loan that aligns with their financial capacity.
Example Calculation
For a loan amount of ₹7,50,000 with an annual interest rate of 14% (equivalent to a monthly interest rate of 1.167%) and a tenure of 30 months, the EMI can be calculated using the following formula:
EMI = [P × R × (1+R)^N] ÷ [(1+R)^N-1]
Where:
- P = ₹7,50,000 (Loan Amount)
- R = 0.01167 (Monthly Interest Rate, calculated as 14%÷12÷10014\% \div 12 \div 10014%÷12÷100)
- N = 30 months (Loan Tenure)
Substituting the values:
EMI=7,50,000×0.01167×(1+0.01167)30(1+0.01167)30−1EMI = \frac{7,50,000 \times 0.01167 \times (1+0.01167)^{30}}{(1+0.01167)^{30}-1}EMI
=(1+0.01167)30−17,50,000×0.01167×(1+0.01167)30
The estimated EMI for this loan would be approximately ₹29,017.
By understanding these factors and the EMI calculation process, borrowers can make well-informed decisions, estimate their repayment obligations accurately, and select the most suitable loan option for their business needs.
Grow your MSME with collateral-free business loans
What is the Impact of Interest Rate on your EMI?
The interest portion of each EMI plays a key role in the total cost of a loan. Higher interest rates lead to higher overall payments, affecting business finances. That’s why understanding how interest rates impact EMIs is crucial for better financial planning and expense management.
This above-mentioned formula helps businesses estimate their monthly repayments, making it easier to plan finances. Since interest rates directly affect EMI, a higher rate results in a larger EMI.
How to Apply for MSME Loan at Kinara Capital?
At Kinara Capital, we have a fully online application process. There is a simple 3-step application process, followed by approval and disbursement. If you meet our MSME loan eligibility criteria, your loan could be processed in just 24 hours. Here’s a step-by-step explanation of Kinara’s loan process:
Step 1: Quick Eligibility Check
In less than a minute, you can find out if your business qualifies for the loan! You can access the eligibility check in seven different languages available on our website for a seamless experience.
Step 2: Screening
The business and the entrepreneur are screened following Kinara’s MSME loan criteria by validating the KYC and registration details.
Step 3: Document Upload
You need to submit your KYC, applicant, co-applicant, business KYC (ID and address proof), applicant PAN Card, business registration document, last 12 months’ bank statements, GST registration (if available), and business vintage proof.
Step 4: Loan Approval
Once you complete the process, your loan application will be reviewed, and if everything is in place, the Kinara officers will approve your MSME loan.
Step 5: Disbursement
Once your loan is approved, you will receive the loan amount directly in your account within 24 hours.
How High MSME Loan Interest Rates Affect Small Businesses
High interest rates on MSME loans can greatly affect the profitability and growth of small businesses. Higher repayment costs can put pressure on cash flow, limiting working capital and making it harder to manage daily operations or fund expansion.
Effects of High Interest Rates on Businesses:
- Cash Flow Pressure: A significant portion of revenue may go toward loan repayments, leaving less for essential activities like marketing or hiring.
- Lower Profit Margins: Higher interest expenses reduce overall profits, which can slow down business growth.
- Limited Expansion Opportunities: With more funds tied up in repayments, businesses may struggle to reinvest in growth initiatives.
To reduce the impact of high interest rates, businesses should carefully evaluate loan options, choose favorable terms, and focus on strengthening their financial health.
Conclusion
Securing the right MSME loan is a crucial step toward business growth, but understanding interest rates, repayment terms, and financial commitments is equally important. High interest rates can strain cash flow and limit expansion opportunities, making it essential for business owners to compare options and make informed borrowing decisions. By planning finances wisely and selecting the best loan structure, MSMEs can optimize their working capital and sustain long-term growth.
At Kinara Capital, we recognize the unique challenges faced by MSMEs and strive to make business financing more accessible and hassle-free. With collateral-free loans ranging from ₹1 lakh to ₹30 lakhs, an AI/ML-driven approval process, and a quick disbursement time of just 24 hours, we ensure that small business owners get the financial support they need, when they need it. Whether you require funds for new machinery, working capital, or business expansion, Kinara Capital provides a seamless digital process in seven languages, making loan access easier than ever.
FAQ
1. Do MSME loan interest rates vary based on the type of business or industry?
Yes, MSME loan rates can vary based on the type of business or industry. Factors like market conditions and risk profiles are taken into consideration when determining the interest rate for an MSME loan.
2. What is the current MSME loan interest rate?
Kinara Capital’s current MSME loan interest rate starts at 24% and is calculated on a reducing rate basis.
3. What factors influence the interest rates on MSME loans?
A variety of factors are taken into consideration when determining the interest rate on an MSME loan. These include business vintage, financial health of the business, loan amount and tenure, order pipeline of the business, and market risks.
