A business loan is a form of monetary advancement granted to lenders by financial institutions for the purpose of meeting various requirements related to their business. Some of the reasons why lenders tend to take business loans are the likes of establishing a business, expanding the same, clearing past dues and meeting working capital requirements. Much like any other form of lending, business loans also attract a particular interest rate levied upon them by the lender.
Such an amount also goes by the name of “cost of borrowing”. This article will essentially walk you through the method of calculating the exact amount of interest that you will be charged upon taking a business loan. Read on for more.
What you need to know before calculating your business loan interest amount?
Before you go ahead and calculate the interest amount that you are supposed to pay as a part of your business loan EMIs, there are a few fundamental variables that you will have to ascertain. After you have figured out what they are, you will have to put them in a formula to arrive at the due loan amount. What you will find below is a list of variables that you will need for the same.
1.Principal Amount: This is the final amount that the lender has decided to disburse your way. Some of the factors that will affect your sanctioned business loan amount is the scale of your establishment, the specific reason for which you need a business loan and the kind of revenue it has been generating, amongst others.
2.Interest Rate: As mentioned above, a business loan, like every other form of lending that exists in the market today, comes with a cost of borrowing. This particular borrowing expense, which is also known as interest rate, is expressed in percentage terms. Typically, the interest rates levied on business loans depend on factors such as repayment tenure, any advance loan payments made before the commencement of the repayment period and credit scores, amongst others.
3.Loan repayment tenure: You will be required to pay off your business loan within a fixed number of years. This time period granted to a borrower is known as the loan repayment tenure. In order to find out the interest amount that you will end up paying by the end of your business loan repayment tenure, you will have to find out the number of instalments that you need to pay. You can find out the same by multiplying the number of years you have to pay off your loan by 12, as EMI payments are typically made monthly.
Once you have arrived on the aforementioned variables, you can use the formula that was mentioned previously. The primary function of the business loan interest calculator is to arrive on a near-to-exact estimate of the EMI amount that you will be liable to pay on a monthly basis. That formula can be found below.
Business Loan EMI calculator formula:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1],
Where,
EMI is Equated Monthly Installment,
P is the principal amount,
R is the monthly rate of interest, and
N is the loan repayment tenure (in months).
Once you have arrived on a near-to-exact estimate of your monthly loan repayment monetary commitment with the help of the above formula, you will have to multiply the same to the number of months you will be paying them for. That should give you a figure that will resemble the final amount that you will pay by the end of your business loan repayment tenure.
After arriving at the figure mentioned above, in order to know the estimate of the total amount that you will pay as interest, you will simply have to subtract your sanctioned principal amount from the same.
Note that the above method will only give you an estimate of your total due Business Loan interest payment. The primary function of doing the same is for you to be able to judge whether you will be able to manage the monthly business loan repayment commitments based on your individual repayment capacity and keep a track of your overall cash outflow. Typically, the answers generated through the above method are fairly accurate.
The only time when you will be able to determine your exact Business Loan Due interest amount, however, is when your conversations with the lending partner surrounding your sanctioned business loan amount are in its advanced stages. Sometime around this point in the loan approval process, the executive representing the lending partner will share a table with you that will give you a break up of each and every EMI payment you will make throughout the course of your business loan repayment tenure. This table is known as the loan amortisation schedule.
Such a table will, amongst many other things, provide you with information regarding the exact business loan EMI amount that you will have to pay off every month. Once you have that, you will have to multiply the same to the number of instalments that you have to pay your loan in and then subtract the sanctioned principal amount from the answer that you get from the multiplication.
If you want to know more about business loan interest rates as well as the kind of application process that you will have to go through to secure one, you can learn more about the same on Finserv MARKETS.
