When you're considering accepting a business loan, it's important to develop a repayment plan. Here's how to calculate loan payments.
If you're looking to secure a loan, you need to know how you'll repay it. Before borrowing funds for your business, it's smart to calculate what your monthly loan payment would be and whether you have the cash flow to support new debt.
Business loans offer small businesses a way to access funding for growth more quickly than they could by saving, but irresponsible borrowing could lead to a business's untimely demise. Here's how to calculate your expected loan payments before accepting funding to be sure your business can meet its debt service obligations.
Loan factors you need to know
To accurately calculate what you would owe on an interest-only loan, you need to understand the following factors:
- The principal amount of the loan, which is the total amount you borrowed
- The term of the loan, or length of time over which the loan must be repaid with interest
- The interest rate of the loan, which is expressed as a percentage
"Small business owners should look closely at interest rate, payment frequency and any fees when evaluating loans," said Jeff Zhou, founder of Fig.
You should also understand the type of loan you are applying for, said Erik Jacobs, partner at Cicero, France, Barch & Alexander P.C.
"Loan types vary. The best advice for a novice is to speak with their attorney or accountant about what loan type may be more advantageous to them," he said. "Critical is the deeper cash flow analysis the business owner must undertake to determine whether the business generates enough income to be able to make the loan payments comfortably."
Once you understand these loan factors, you can begin to calculate your monthly payment.
