How does an entrepreneur calculate the cost of a loan? To provide more insight, a calculation example and a table can be found on this page. The costs of a loan are also discussed and how they come about.
Calculate the total cost of a business loan
A monthly loan is part of a business loan. This is part of the loan that must be paid every month to repay the loan. In a calculation, the monthly amount is an approximation of the actual monthly burden. So there may be rounding differences. As a result, the amount may deviate slightly from the actual monthly charge. The lender’s calculation is leading. With just repaying the loan, the entrepreneur is not there yet. Interest still has to be paid on a business loan. In addition, it is possible that accelerated repayments may not be made penalty-free, or that there are additional costs. All these factors must be included in the total costs.
Make the calculation
A calculator makes it easy to calculate the total cost of the business loan. For this, the entrepreneur enters the loan amount, the interest rate, the loan term and the starting premium. The monthly additional costs must also be entered. A loan can be paid in two ways: annuity and linear. The entrepreneur specifies this in the calculator. The total costs are then calculated. It is useful to view the monthly costs. It is then clear and clear which payment obligations must be met every month.
Interest on a business loan
With a business loan, all data is recorded at the time of taking out. For example, an interest rate is also agreed. This is a percentage of the loan, which is in addition to the loan to repay. It can be seen as a kind of supplement to be allowed to borrow. The business interest for a business credit is between 3.8 and 20% on an annual basis. The interest is determined on the basis of the market interest rate, the risk profile and collateral. What these terms mean is explained under the heading ‘Important terms’.
Term of a business loan
We refer to how long a loan lasts. The duration of the term depends on the economic life of a business asset or of a property that is financed by the loan. The term differs per provider and per loan. The minimum term of a loan is often one year. The term determines in how many years the entrepreneur must repay the loan. The vast majority of providers have a term of one to ten years. During the term, repayments must be made monthly. All costs for the loan, the closing commission and the interest must then be paid.
An example: suppose an entrepreneur needs money to finance new equipment and office furnishings. The entrepreneur takes a thorough approach and applies for a business loan of 10,000 USD. For this, a business credit will be taken out.
The entrepreneur pays a closing commission. Usually this is between 2 and 3 percent of the loan amount. Let’s assume 2%. Then the closing commission is 200 USD.
Interest must be paid on the loan. In our example, the interest is 4% on an annual basis, with a term of 5 years. The entrepreneur pays 10,000 x 0.04 = 400 USD in interest per year. The term is 5 years, so we do this amount times 4. The total amount is then 2000 USD. Every month (400/12) = 33.33 USD must be paid.
Does the entrepreneur not immediately withdraw the amount? Then he may pay an interest-rate premium for this. This is lower than the normal interest rate. The entrepreneur waits 2 months before recording. The interest is then (5000 x 0.03) x 2/12 = 25 USD.
The entrepreneur wants to repay early. For this he pays a fine of between 100 and 200 USD. It often says nothing about the interest obligation: for this the entrepreneur pays the total amount of interest agreed upon closing. However, it can be nice to repay part of the debt early.