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‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.
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Do you think that a small change in interest rate can really impact your business? Well, yes it can make a huge impact on your business.
Mohan runs a small manufacturing unit in Hyderabad, In April 2023, he borrowed ₹50 lakh at 9% annual interest to buy new machinery.
His monthly EMI is ₹52,074.
However, in December, the interest rate increased to 11%. Now, he is paying an EMI of ₹54,959.
You can see that a 2% increase in interest rate made a monthly difference of ₹2,885 in his EMI and ₹34,620 annually. Such an amount is enough to delay hiring a new technician.
A change in interest rate might sound like a small change to you but its impact is huge. It plays an important role in business in:
Even the slightest change in interest rate can impact a business’s:
Let’s have a look at the changes in EMI with interest rate rise on ₹25 lakh business loan for 5 years:
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Interest Rate | Monthly EMI | Annual EMI | Total Interest Paid |
8% | ₹50,700 | ₹6,08,400 | ₹5,52,000 |
You can see that a small change of 3% results in almost ₹60,000 more in interest per year. It impacts the budget planned by the company.
As loan EMIs go up it reduces the cash flow of your business and impacts day-to-day operations.
Due to an increase in interest rates, you might have to postpone buying new equipment, hiring staff, or entering new markets.
The more money you pay as interest, means less profits. Let’s look at an example of profits before and after a change in interest rates:
Year | Revenue | Cost | Interest | Net Profit |
2022 | ₹50 Lakh | ₹35 Lakh |
If the cash flow of your business decreases, then you might not be able to make timely payments to the suppliers. It will affect your business reputation.
It is very easy for you to understand that when rates fall, your monthly EMI decreases, and now you will be able to save more.
Jigyasa took a business loan of ₹15 lakh in 2022, at 10%. Let’s look at how falling interest rates help her business:
Year | Loan Amount | Interest Rate | EMI |
2022 |
9%
₹52,075 |
₹6,24,900 |
₹6,49,500 |
10% | ₹53,540 | ₹6,42,480 | ₹7,54,800 |
11% | ₹55,095 | ₹6,61,140 | ₹8,68,500 |
₹12.5 Lakh |
2023 | ₹50 Lakh | ₹35 Lakh | ₹3.2 Lakh | ₹11.8 Lakh |
*T&C Apply
10% |
₹31,872 |
2023 | ₹15 lakh | 8.5% | ₹30,888 |
She was able to save ₹984 monthly or ₹11,808 annually. She used this amount to buy new lighting and refrigeration upgrades, improving customer experience.
1. Switch to Fixed-Rate Loans, which will protect you from rate hikes.
2. Use cash flow forecasting as it will help you in planning expenses.
3. Maintain an emergency buffer of at least 3 months of EMI in cash.
You cannot control changing interest rates. But you can make simple changes in your day-to-day operations.
The following are the beneficial tips to improve your cash flow:
Strategy | Potential Gain (Yearly) |
Delay non-urgent purchases | ₹25,000 |
Lease instead of buying equipment | ₹35,000 |
Faster invoicing | ₹10,000 |
Cut non-core expenses | ₹15,000 |
Negotiate with vendors | ₹20,000 |
If you use basic tools such as Excel, bank alerts, or accounting apps they will help you in monitoring changes.
Metric | Target Value |
EMI-to-Revenue Ratio | Under 25% |
Net Profit Margin | Above 10% |
Days Payable Outstanding | Under 45 Days |
Interest Coverage Ratio | Above 2 |
Interest rates will always go up and down. But if your business is well-managed you can stay steady even during such shifts.
Your business will face both long-term and short-term challenges but with proper monitoring strategies, it will recover soon.
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It is essential for the growth of your business that you watch each money movement of your business. Try to reduce your non-essential purchases and you will be able to save more.
1. How can I reduce my monthly financial stress?
You can reduce it by tracking expenses, building a reserve, and avoiding non-essential purchases.
2. Can cash flow issues affect my credit score?
Yes, delayed loan repayments due to poor cash flow may impact your score.
3. Is it a good idea to prepay small parts of my loan?
Yes, even small prepayments can lower your interest burden in the long run.
4. Can rising rates affect inventory buying?
Yes, higher EMIs may leave less cash for stocking goods.
