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LaunchCalculating 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.
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.
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 |
Monthly Repayment |
Annual Interest Paid |
Annual Princial Paid |
Total Annual Payment |
Ending Balance |
|---|---|---|---|---|---|---|
| 1 | $20,000.00 | $483.33 | $1,800.00 | $4,000.00 | $5,800.00 | $16,000.00 |
| 2 | $16,000.00 | $453.33 | $1,440.00 | $4,000.00 | $5,440.00 | $12,000.00 |
| 3 | $12,000.00 | $423.33 | $1,080.00 | $4,000.00 | $5,080.00 | $8,000.00 |
| 4 | $8,000.00 | $393.33 | $720.00 | $4,000.00 | $4,720.00 | $4,000.00 |
| 5 | $4,000.00 | $363.33 | $360.00 | $4,000.00 | $4,360.00 | 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.
How long can you get a business loan for?
Small business loans range from 3 months to 3 years through online business lenders. Through the traditional banks you are able to secure much longer term loans however the process to getting a loan might be prohibitive.
What is the minimum and maximum loan amounts?
You can borrow as little as $5,000 and up to $500,000 with an online fintech lender. Typically, you are able to borrow up to one months revenue. For instance, if your monthly revenue was $40,000, you would be able to borrow up to $40,000.
With banks, you will be able to borrow as much as your cash-flow and security supports.
FAQs
Q: How do you calculate the interest for a business loan?
Depending on the interest method used, there are different calculations. To calculate the Factor Rate, multiply the loan amount by the factor rate. To calculate Simple Interest, multiply the loan amount by the interest rate as a decimal (for example 10% would be 0.1), and then multiply this number by the term in years (for example, 6 months would be 6/12 = 0.5).
Q: What interest types are used for small business loans?
Typical interest types for small business loans include Simple Interest, Factor Rate and Annual Percentage Rate (APR).
Q: What is the typical term for a business loan?
Small business loan terms can range from as little as three months, up to 36 months. A typical term is approximately 12 months.