Empower Your Financial Planning: Tools And Tips To Calculate Business Loan Repayments

Small businesses borrow business loans to secure funds and grow their operations. When you borrow a business loan, it is crucial to understand the repayment structure. You may calculate business loan repayments before you accept a loan offer.

Calculating your business loan repayments effectively lets you plan your business’s financial future. Understanding how much your monthly repayments might help you make an informed decision about a business loan.

Read on to learn more about calculating business loan repayments to avoid any surprises in the future.

Understanding Business Loans For Small Businesses

Small businesses across Australia typically utilise business loans to secure the capital they need to fund their financial growth. A business loan is a lump sum of borrowed funds that might allow small businesses to finance any expenses they have. Once the loan has been approved, a business is obliged to repay the money over a set period, typically with a fixed interest rate.

You, as a small business owner, may use a business loan to fund unexpected expenses, purchase equipment, or maintain cash flow during seasonal fluctuations.

In other words, a business loan allows you to borrow funds to access working capital for day-to-day operations or to purchase assets.

Business loans for small businesses are either secured or unsecured. A secured loan is a type of loan that requires collateral. Businesses use commercial assets or residential properties as collateral for secured loans.

In contrast, unsecured loans are not secured with an asset. Because of the lack of collateral, unsecured loans usually have higher interest rates.

Small businesses generally have an easier time securing unsecured loans as the requirements are more flexible, and they have higher approval rates by lenders.

Why Calculate Business Loan Repayment

The loans small businesses apply for generally have higher interest rates and pre-set repayment schedules. Because of this, it is beneficial to calculate your potential repayment amount to determine if you can afford it.

A general understanding of how much your loan repayments may be useful in helping you budget your funds to ensure you make timely payments. If you have some concerns over the repayment, it is vital to consider if the monthly repayments are doable for your business with the added interest rate.

Besides using a business loan calculator, a great loan management tip is to set a business budget. Incorporating both may help you manage your funds better and ensure you do not default on your loan.

Business loan calculator

A business loan calculator is an incredibly useful tool to determine your business loan’s total cost. 

To calculate the repayments, you input the principal amount of your loan, interest rate, and number of months in the repayment period.

You may calculate the repayments of different business loans with the help of a calculator. This allows you to compare loans and choose the one best suited to your needs and repayment abilities.

You may use one of the many available business loan calculators online and get your calculations by adding the following information about a specific business loan:

• The business loan amount
• Select the repayments (monthly, fortnightly, or weekly)
• Input terms in years
• The interest rate
• The repayment type (principal and interest, or interest only)

After you input all of the required information into the business loan calculator, it will provide you with results about the monthly repayment and total interest amount.

Estimate monthly business loan repayment

Another tool you may use to calculate monthly business loan repayments is Excel. The first thing to do to estimate your business’s monthly payments with Excel is to input the business loan amount, interest rate, and terms into a spreadsheet.

After you do that, use Excel’s PMT function, which calculates the repayments for a loan based on constant payments and a constant interest rate.

The PMT function in Excel works by incorporating several components of the formula. The full formula is “=PMT (rate, nper, pv, [fv], [type])”, where the components correlate the following:

• Rate = the interest rate
• Nper = the number of loan payments
• Pv = the principal value
• Fv = the future value
• Type = 0 (beginning) or 1 (end) of the period

You can also use the financial formula “P = (Pv*R) / [1 -(1 + R)^(-n)]“ to estimate the repayment manually.

• PV = principal value (beginning value or amount of loan)
• APR = annual percentage rate 
• R = periodic interest rate = APR/ number of interest periods per year 
• P = monthly payment 
• n = number of interest periods for the overall time period

These explanations provide a general guidance of how you can use Excel’s PMT function and the manual formula to calculate loan repayments. However, please ensure that the formulas are used accurately depending on your specific needs and that all relevant variables are correctly identified and defined.

Calculating The Interest For A Business Loan

Generally, the interest types for business loans include factor rate, simple interest, and annual percentage rate (APR).

Based on the interest method used for your small business loan, there are different ways to calculate it. 

• Calculating the factor rate – multiply the business loan amount by the factor rate. 
• Calculating the simple interest – multiply the business loan amount by the interest rate as a decimal (for instance, 10% = 0.1). The number you get as a result, multiply it by the term in years (as an example, 6 months will be 6/12 = 0.5).

Frequently Asked Questions

How long are typically the terms for small business loans?

The terms may vary depending on whether you are seeking a loan for your small business to finance day-to-day operations or expansion purposes.

Based on the amount you borrow and its purpose, the business loan terms may last from 3 months up to 36 months. The typical term is most often around 12 months for small business loans.

What types of small business loans are there? 

Small businesses have several options when it comes to business loans, such as short-term business loan, business line of credit, equipment financing, invoice financing, merchant cash advance, business overdraft, and overdraft facility.

Conclusion

As a small business, it is wise to know how to calculate business loan repayment. This allows you to choose an affordable business loan offer for your small business, and you may easily meet the monthly repayments.  

You may use various tools to calculate your business loan repayments. This includes a business loan calculator, Excel spreadsheets, or even a manual calculation. 

A general understanding of your loan repayments could be an excellent financial planning strategy for your small business.