When business owners seek funding, one of the first factors they often consider is the rate of interest (ROI) associated with the loan or credit facility. While interest rates undeniably influence the cost of borrowing, focusing solely on them can be shortsighted. A viability study, which examines the feasibility and overall impact of the funding on the business, is a far more critical factor in making informed financial decisions.

Let’s explore why the viability study of business funding takes precedence over the rate of interest.

1. Interest Rates Are Only One Piece of the Puzzle

The rate of interest reflects the cost of borrowing but does not account for whether the funding will generate sustainable business growth.

• Example: A loan with a low interest rate might seem attractive, but if the funding is used for a poorly planned project, it can lead to losses or even debt traps.
• Takeaway: The viability study ensures that the funding will positively impact your business, regardless of the interest rate.

2. Viability Studies Assess the Bigger Picture

A viability study evaluates key aspects of the funding, such as:

• Purpose: Is the funding aligned with your business goals?
• Cash Flow Impact: Will the repayment structure fit your cash flow cycles?
• Market Feasibility: Will the project generate sufficient revenue to justify the investment?
  By considering these factors, the study ensures that the funding is not just affordable but also meaningful for the business’s growth.

3. The Danger Of Accessing Low Interest Loans

While low interest rates are enticing, it carries fixed costs for the business.

• Example: If the business needs 1cr working capital whereas banks are ready to offer 50L at 11% then it can be used only after you arrange additional funds of 50 lakh..
• Similarly, if  in another deal banks are offering 1cr at 12% then the business will make money if  the return in business is higher than 12% otherwise business has to incur a cost of 50L without actually generating income out of it.

4. Ensures Better Allocation of Resources

The viability study helps prioritize projects or needs that deliver maximum value.

• Example: Instead of using low-interest funding for a non-essential upgrade, a viability study might recommend investing in working capital to stabilize operations or meet seasonal demand.
• Result: Funds are allocated where they matter most, increasing the business’s efficiency and profitability.

5. Focuses on Long-Term Sustainability

Interest rates are a short-term concern, while a viability study considers long-term outcomes.

• Example: A high-interest loan used for a scalable and profitable business model may provide long-term gains that far outweigh the cost of borrowing.
• Impact: The viability study ensures the funding decision supports future growth and avoids financial pitfalls.

6. Builds Confidence for Stakeholders

A well-conducted viability study demonstrates that your business is making informed decisions.

• Example: Investors, partners, and lenders are more likely to trust a business that has carefully evaluated the impact of funding beyond the interest rate.
• Outcome: This trust can lead to better opportunities for future funding and collaboration.

Conclusion

While the rate of interest is an important factor in business funding decisions, it should not overshadow the significance of a viability study. Interest rates only indicate the cost of borrowing, whereas a viability study evaluates the broader implications and ensures the funding contributes to sustainable growth.

At NKB Kredit, we specialize in helping businesses make well-informed funding decisions by conducting comprehensive viability studies. Our expertise ensures that your funding aligns with your goals and leads to lasting success.

Ready to take your business to the next level? Let’s connect today and ensure your funding decisions are future-proof!