As a business owner, you have to take on different roles each day. One day you are a strategist, the other an investor. A skill that every business owner must excel at is securing credit flow for the business. Business loans are now accessible to almost every business owner; however, to make the best call it is important to understand what factors determine interest rate, tenure and loan amount.
Let’s learn how economic indicators play a major role in the interest rates you are charged for every borrowing.
Understanding Economic Indicators
Before moving ahead, let’s first understand what economic indicators are. Economic indicators are primarily used as a reference point by investors to decide their money. These indicators help understand the market trend and entry and exit points. A few common examples of economic indicators would be consumer price index or gross domestic product etc.
Different types of economic indicators can be broadly categorised into:
- Leading Indicator: Indicators that indicate the probability of an event before its occurrence are called as leading indicators. These indicators help identify future shifts like interest rates increase or decrease, etc. and can help prepare and take measures to overcome possible adversities. Indicators such as consumer durables, yield curve, share prices etc are taken as leading indicators by experts as the measures of these indicators change even before the shift in the economy overall.
- Coincident Indicators: Indicators that indicate the occurrence of an event while it is happening, i.e. the indicator coincides with the occurrence of the event are called as coincident indicators. While looking at changes in the economy of a particular area or region, coincident indicators like GDP and employment levels play a vital role. Coincident indicators are great to verify the cause-effect relationship.
- Lagging Indicators: Indicators that indicate the occurrence of an event after the event has already occurred are called as lagging indicators. As the name suggests, these are delayed indicators that often occur after a certain specific economic event. These include unemployment rates, CPI or Gross National Product (GNP). Lagging indicators help verify backdated events with the help of delayed reaction or effects.
Economic Indicators: Impact on Business Loan Interest Rates
Now that you have a fundamental understanding of what economic indicators are, let’s decode their impact on business loan interest rates.
Here’s how different economic indicators can alter the interest rate in business loans:
- Inflation
In layman’s terms, inflation refers to the pace at which the money loses its value, or rise in cost of goods and services. Inflation is possibly one of the most influential economic indicators. Referring to the rising cost of goods and services, high inflation forces the Reserve Bank of India to amend its policies to control inflation. Increasing interest rates on loans to limit borrowing is a step that RBI takes to curb rising inflation. This not only limits borrowing but also reduces spending power. Inflation and interest rates have a dynamic relationship, high inflation leads to higher interest rates, however, how interest rates affect inflation is that higher interest rates leads to decrease in inflation.
- Economic Growth
If the market is sound and is observed to be growing economically, the interest rates are kept minimal. Economic growth is a reliable indicator to gauge whether or not it is the right time to borrow. A positive economic growth will automatically promise business loans with low interest rates. Citing the fact that India’s economy is growing at a rapid pace, it is opening up new business opportunities, this coupled with various government run schemes to promote specific industrial growth as well as entrepreneurship, interest rate on business loan in India has become stable which has resulted in increased credit utilization in the economy.
Additional Info: Economic growth is directly equivalent to the rising ability of the consumer market to purchase goods and services. This is also referred to as adjusted inflation, where even though the price of goods and services is rising, the purchasing power of consumers keeps getting better.
- Liquidity
Liquidity and interest rates have an inverse relationship. Higher liquidity leads to lower inflation and vice versa. The reason being, interest rates are offered when excess money (liquid money) is invested in less liquid financial instrument. The ease of money flow in the economic market is referred to as liquidity. If there is enough liquidity overall, the interest rates on business loans are at minimal levels. However, if the flow of money in the market is restricted for any reason, the interest rate of business loans in India charged on business loans keeps increasing. Individual as well as business loan interest rates in India are highly dependent upon the liquidity in the economy, and the measures taken by the reserve bank to control or enhance the liquidity.
- Global Market Trend
Remember that India’s economy does not operate in isolation. This is to say that the country’s economy is impacted by global market trends, policy changes in any country on which India relies for imports or an unfriendly relation with a country impacts India’s economy. If the global market trend is not showing favourable patterns, RBI is again forced to amend its policies by charging high interest rates on loans.
Did You Know that the Taper Tantrum policy of the US Federal Bank impacted not only the economy of the US but also the Indian market also faced an evident spike in the interest rates on business loans?
Keep an Eye on these Economic Indicators
As a business owner, you must gauge economic indicators before implementing any policy for the government. Opting for a business loan is a major decision for the business’s growth.
Here’s a list of economic indicators that business owners must look out for:
- Gross Domestic Product
Gross domestic product reflects the goods and services being consumed in the market. GDP is an important economic indicator representing the country’s economic health that plays a vital role in amending interest rates and other aspects of lending and borrowing. An increasing gross domestic product of the economy highlights that the productivity of the businesses across various industries in the country is increasing. This happens due to various reasons and has a long standing and deep impact on the consumer habits and lending policies for industries in focus.
- Consumer Spending
Tracking trends in consumer spending is something that every business owner must keep an eye on. It reflects the demand for the business’s goods and services that impacts the way the lender sees you as a borrower. An increased consumer spending is an indicator of increasing wealth in the economy, which is an attribute of socio-economic development. It is one of the most important economic indicators citing the fact that it helps identify whether the overall increase in wealth is for a particular substrata of the society or the society at large. This data can further help lenders to formulate their lending strategy that fits the economic needs well.
- Trade Balance
Trade balance represents the relation between exports and imports of the country. A simple rule states that exports overpowering imports represent a positive trend in trade balance that will ultimately have a promising impact on business loan interest rates. For countries that are in a trade deficit, the government can run various special schemes to promote a particular sector to boost productivity. Under these special schemes, lower interest rates, prioritized lending, among many other benefits are given. Trade balance is an important economic indicator as it not only helps identify the difference between imports and exports but also helps identify the sectors that can do better.
- Public Policy and Regulations
Probably you are already aware of the role government policies and regulations play in deciding the interest rates charged on business loans. For instance: The Indian government’s initiative to boost the growth of MSMEs through Pradhan Mantri Mudra Yojana has helped small businesses borrow at minimal interest rates.
Economic Indicators: Using them for Securing Business Loan
Economic indicators impact interest loans under business loans however this doesn’t mean that you can not strategies well to secure a favourable business loan. As a business owner looking for a loan, staying updated with the following can help:
- Analyzing Economic Data
Economic data comprises numerous factors like Gross Domestic Product, Consumer Price Index, Inflation, Global Economic Trends and a lot more. Keeping an eye on and smartly analyzing economic data can help understand the potential changes in interest rates on business loans. Analyzing economic data can help massively with deriving actionable insights, these insights can help make decisions which will have a positive impact on the business and the economy at large, and make use of the upcoming opportunities.
- Follow RBI Updates
The Reserve Bank of India is the controlling body for the Indian economy making it crucial for you to follow new guidelines, rules and regulations. These updates are instrumental to lending and borrowing in the country. Being updated with the latest updates can help make sensible decisions with respect to borrowing.
- Compare Interest Rates
Remember that interest rates charged by different lenders vary due to their economic stability. Although analysing a lender’s economic stability appears too specific but is a reliable economic indicator. Make sure to check and compare different interest rates.
To Conclude
Higher interest rates under a business loan can negatively impact your financial planning. This is why it is suggested to perform due diligence before finalising a business loan. Economic indicators make it easy for you to assess what time is ideal to borrow, which lender to trust and what interest rates are reasonable given the market condition.
Remember to choose a lender that believes in adding wings to your dream. At Lendingkart, interest rates are minimal and in addition, business owners enjoy the benefit of flexible tenure and repayment options
