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Calculating Small Business Loan Repayments


When borrowing money for your business it's important to understand the repayment structures of the various loan options. It can also affect how much you can borrow.

1

Standard business loans offered by banks use interest rates the are calculated on an annual percentage rate basis. They are repaid monthly over a period of years.

2

Unsecured business loan interest rates are calculated using a "factor rate". This is a very different interest calculation. Learn how to calculate using factor rates further below.

Example Repayment Schedule


With traditional loans you will pay back both principal and interest each payment. Below we have illustrated an amortisation schedule for a business borrowing $20,000 over 5 years at a 9% interest rate.

Year Beginning
Balance
Total
Payment
Monthly
Repayment
Interest
Paid
Princial
Paid
Ending
Balance
1 $20,000.00 $5,800.00 $483.33 $1,800.00 $4,000.00 $16,000.00
2 $16,000.00 $5,440.00 $453.33 $1,440.00 $4,000.00 $12,000.00
3 $12,000.00 $5,080.00 $423.33 $1,080.00 $4,000.00 $8,000.00
4 $8,000.00 $4,720.00 $393.33 $720.00 $4,000.00 $4,000.00
5 $4,000.00 $4,360.00 $363.33 $360.00 $4,000.00 Zero

Calculating the interest rates of unsecured business loans using a factor rate

Let’s say you borrow $30,000 over 12 months at a factor rate of 1.35%

1.35 multiplied by $30,000 totals $40,500

On average there are 22 business days per month.

22 business days multiplied by 12 months is 264 days (payments)

$40,500 divided by 264 equals $153.41

$153.41 is your daily repayment (excluding any fees and charges).

How much can I borrow?

Typically with unsecured business loans you’re going to be able to borrow up to 80% of free cash flow (what’s left after all your bills are paid).

With secured lending over a longer term you will be able to borrow greater sums of money especially if you securitise the business loan against your home or other assets.

It’s not just the interest rate you need to be aware of, you also want to consider all fees and charges associated with business loans.

Grow the business you want.

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