In the simplest terms, a loan can be described as a type of debt. And, in order to clear off this liability, a borrower is given a specific timeline to pay it back in the form of agreed instalments.

One of the main tasks of an SME Loan provider is to serve as a source of funding— Banks and other institutions offering business loan are helping to manage the cash flow in the industrial segment.

working Capital loan has different components, each having carrying separate costs— Here’s how it broadly works.

Interest Rate 

Interest Rate is the value of capital that bankers or private financial institutions gain when they make credit that a borrower has to pay back within stipulated timeline— It is a specific percentage of the loan amount that the lender charges against funding.

Here’s a standard formula for calculating interest rate on loan taken.

(Interest Rate/Count of payments) x Loan Principal Amount = Interest

Loan Processing Fee

The loan processing fee is a one-time payment imposed at the time of agreement by a lender on a borrower. Many banks or private financing firms charge a fixed processing fee against the unsecured business loan taken. It is worthwhile to mention that the processing fees are often non-refundable in nature, even in case of loan rejection. Besides, the exact processing charges applicable could vary significantly from one funding company to another.

It is often levied by financial firms to cover the loan related formalities such as expenditures incurred for collecting papers and generating reports, credit evaluation, and attestation process. Also, you may negotiate your processing fee with your creditor, especially when you are borrowing a considerably significant amount of loan for small business. 

Foreclosure Charges 

Foreclosure of a business loan simply means making complete repayment of your pending instalments, all together in one go.

For a lender, Foreclosure charges are an essential part of the fee revenue, and hence, they add to the bottom line. However, as per the recent guidelines from the Reserve Bank of India, they have barred NBFCs from imposing prepayment fines or foreclosure costs to the individual borrowers.

A public notice released by the Central bank recently read as follows:

NBFCs shall not charge foreclosure charges/pre-payment penalties on any floating rate term loans sanctioned for purposes other than business to individual borrowers, with or without co-obligates.”

However, there is no respite from the foreclosure fees as of now for the ones who intend to apply a loan for retailers.

Insurance Bundling

Business insurance coverage protects companies from damages due to events that are can happen in a typical corporate/industrial environment. A business insurance policy can offer coverage on several parameters such as property damage, failure to pay the debt in time, worker-related risks, etc. to name a few.

The term insurance bundling signifies that a person/company has more than one type of insurance product in the running, purchased from the same insurance firm; If you decide to buy it to cover the company debt or any other asset, it will add up to your Working Capital loan charges.

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