3 Ways to Borrow Money for Your Business as an entrepreneur

3 Ways to Borrow Money for Your Business as an entrepreneur

— And Why the Lowest Interest Rate Isn’t Always the Cheapest

When a business needs money, the natural reaction is to look for the lowest interest rate.

You might find:

Business loan — 15%
Personal Line of Credit — 11%
Collateral-backed loan — 9%

So it seems obvious:

9% must be cheapest.

But this is where borrowing gets interesting.

The headline interest rate is only one part of the cost. You also need to understand whether the rate is flat or reducing, whether GST is charged on the interest, what fees apply, and whether you are putting an asset at risk.

Let’s take a simple ₹3.45 lakh example and understand the three options.

First, understand the two ways interest is usually calculated

Flat-rate interest

A flat-rate loan calculates interest on the original amount borrowed.

If you borrow ₹3.45 lakh at 9% flat for three years:

₹3,45,000 × 9% × 3 = ₹93,150

Even though you are repaying the principal during those three years, the interest calculation remains based on the original principal.

Reducing-balance interest

With a reducing-balance loan, interest is calculated on the outstanding principal.

You start with ₹3.45 lakh.

After your first few EMIs, perhaps ₹3.35 lakh remains.

Later, ₹3 lakh.

Then ₹2.5 lakh.

And so on.

So the interest amount keeps falling because the amount you owe keeps falling.

This is why an 11% reducing loan can potentially cost less than a 9% flat-rate loan.

And that’s exactly what happens in our example.

1. Business Loan — 15%

The first option is a traditional business loan.

Suppose the business can borrow at approximately 15% per annum.

The advantage is that the borrowing is designed around the business itself.

It can make sense when you need:

• working capital
• business expansion
• equipment
• inventory
• a larger structured facility
• longer-term business financing

But don’t simply look at 15%.

You need to ask the lender:

Is the 15% reducing or flat?

And then ask:

What is the total repayment over the entire tenure?

You also need to account for processing fees, documentation charges and other applicable costs.

For illustration, if ₹3.45 lakh were financed at 15% reducing over 36 months, the interest would be roughly ₹84,500 before any additional applicable charges.

So the important number isn’t:

“15%.”

It is:

“How many rupees will this ₹3.45 lakh actually cost my business?”

2. Personal Line of Credit — 11% reducing

Now let’s look at the interesting one.

Suppose you have a good personal credit score and receive a PLCC at 11% reducing.

You borrow:

₹3,45,000

for:

36 months

The loan’s contractual rate is 11%.

But because it is reducing-balance, you don’t pay 11% on ₹3.45 lakh every year.

Your outstanding principal keeps declining.

For the specific schedule we’ve been discussing:

Total interest = ₹61,615

Now add GST on the interest:

GST = ₹11,091

Therefore:

Interest + GST = ₹72,706

And your total principal + financing cost becomes approximately:

₹4,17,706

This is the number I would focus on.

But why do people say the cost becomes ~13.8%?

This is where loan terminology can confuse people.

There are different ways of expressing the cost of a loan.

The contractual rate is:

11% reducing

The GST increases your actual cash outflow because you’re paying tax on the interest component.

If you simply take the total ₹72,706 interest + GST and spread it over the original ₹3.45 lakh for three years:

₹72,706 ÷ ₹3,45,000 ÷ 3

= 7.02% simple-equivalent annual cost.

But that’s not an effective annual interest rate.

An annualized borrowing-cost calculation that accounts for the fact that you receive the money upfront but repay it progressively through EMIs can be considerably higher — around the 13–14% range depending on exactly how the cash flows and GST payments are treated.

These numbers aren’t contradictory.

They’re answering different questions.

For a normal borrower, the simplest question is:

“I borrowed ₹3.45 lakh. How many extra rupees will this loan cost me?”

For this example:

₹72,706.

That’s much easier to understand than trying to make one percentage answer do everything.

3. Collateral Loan — 9% fixed

Now we come to the loan that looks cheapest.

Suppose you have gold or another acceptable asset and can borrow:

₹3,45,000

at:

9% fixed/flat

And let’s assume, as in our example, that the quoted 9% is already the all-inclusive borrowing cost.

The calculation is:

₹3,45,000 × 9% × 3

=

₹93,150

So you would pay:

₹93,150 borrowing cost

and a total of:

₹4,38,150

over the three years.

Now compare:

9% flat → ₹93,150

versus

11% reducing + GST → ₹72,706

Suddenly, the loan advertised at 11% is cheaper by approximately ₹20,444.

That’s the entire point of this exercise.

The three loans side by side

*Illustrative only. Actual business-loan costs depend on the lender’s exact repayment structure, fees and applicable taxes.

So what is “good borrowing”?

This is where I think the conversation should move beyond:

“Debt is good.”

or

“Debt is bad.”

Neither is particularly useful.

Borrowing is a tool.

The important question is whether the particular borrowing makes sense for the particular purpose.

Borrowing can be productive when:

You borrow ₹3 lakh to acquire inventory that you can sell profitably.

You borrow to fund marketing that has a reasonable path to generating additional revenue.

You borrow to purchase equipment that increases your capacity.

You bridge a temporary working-capital gap while waiting for predictable receivables.

You preserve liquidity because using all your cash would leave the business dangerously exposed.

In all these cases, the debt has a job.

But borrowing can also become a trap

Imagine your business needs ₹2 lakh every month just to cover a recurring cash deficit.

You take a loan.

Then another.

Then another.

The borrowing hasn’t created anything.

It has simply moved the expense from:

today

to:

today + EMI.

Now you have to generate enough money to cover:

normal business expenses + old debt + new debt.

That’s when borrowing becomes dangerous.

Not because debt itself is bad.

Because the underlying cash flow isn’t supporting the debt.

Think of borrowed money as capital with a job

This is probably the simplest framework I would use.

If I borrow ₹3.45 lakh, I should be able to say:

“This money is going here, this money is going there, and this is what I expect it to accomplish.”

For example:

₹1 lakh → marketing

₹75,000 → technology

₹1 lakh → working capital

₹50,000 → opportunity reserve

Now the borrowing is intentional.

Instead of:

“I have access to ₹3.45 lakh, so I can spend ₹3.45 lakh.”

That’s a very different mindset.

And don’t forget what you’re risking

The interest rate isn’t the only price.

With unsecured personal borrowing, you’re primarily taking on a future cash-flow obligation.

With collateral borrowing, you’re also putting an existing asset at risk.

With business borrowing, you’re putting pressure on the company’s future cash flow.

So sometimes paying ₹10,000 more in interest can be perfectly rational if it means avoiding unnecessary collateral risk.

The cheapest loan mathematically isn’t necessarily the cheapest loan economically.

My five-question borrowing test

Before taking any loan, I would ask:

1. What exactly do I need the money for?

If you can’t answer this, don’t borrow yet.

2. Is the rate flat or reducing?

This can completely change the actual cost.

3. What is my total rupee cost?

Interest + GST + fees + other charges.

4. What am I putting at risk?

Future income, personal credit, business cash flow or an existing asset?

5. What will the money produce?

Revenue, profit, growth, liquidity protection — or simply consumption?

The real lesson

If someone tells me:

“I got a loan at 9%.”

I don’t know enough yet.

I want to know:

9% flat or reducing?

For how long?

What fees?

What taxes?

How much did you actually receive?

How much will you repay?

And:

What did you use the money for?

Because in our simple example:

9% fixed/flat = ₹93,150 cost

while

11% reducing + GST = ₹72,706 cost.

The 11% loan is actually cheaper.

That’s the lesson I would take away as an entrepreneur:

Don’t shop for the lowest interest rate. Shop for the lowest sensible cost of capital for the job you need the money to do.

And once you understand flat vs reducing, total cost, GST, fees and risk, borrowing becomes much easier to evaluate.

You’re no longer asking:

“Which loan has the lowest number?”

You’re asking the much better question:

“Which form of capital makes the most sense for what I’m trying to accomplish?”