Loans are a way of sourcing funds from loan providers who charge a specific rate of interest during repayment. When you take a business loan, it comes with the responsibility of repayment. Hence, you need to make a detailed repayment plan before securing a loan. This step is a mandatory clause before applying and securing a loan, as it will help you analyze the business loan interest rate that you ought to pay every month. It will help you assess whether you have enough cash flow and turnover in the business to help you repay the loan easily.
Business loans are offered to businesses that need funds, and these funds help in the growth and expansion of the business. But one must be cautious about borrowing responsibly, as borrowing without planning can put your business into deep trouble. One can calculate the interest rates using a business loan EMI calculator. Here’s a brief of how you can calculate loan payments.
What is a business loan?
A business loan is a sum borrowed from a lender at considerable interest rates and has to be repaid within the agreed tenure. The principal amount is the total amount of borrowed loan from the lender. The tenure of the loan as agreed by the parties is the total time available for the repayment of such loans. The interest is calculated at a certain percentage of the principal amount. Only when a business understands these three terms well, it can calculate the loan repayment on its own.
The type of loan applied for, interest rates, payment frequency, and repayment tenure are crucial in determining the loan repayment. Choosing the most advantageous loan for a business, with all the above criteria in mind can help you in the long run with hassle-free loan repayment. The most important factor is to make such an analysis to determine whether the loan undertaken will match the cash inflow the business generates. Once you are clear with these factors, you can easily calculate your loan repayment.
Calculating loan repayment
Calculating loans differs mainly from the type of loan applied for. For example, an interest-only loan is calculated differently from an amortizing loan.
A simple interest-only loan repays the loan amount with the same interest rate over the agreed loan tenure. This means that interest-only loans do not repay the loan balance. For the first couple of years of the loan, you only pay the interest that will be accumulated for the entire principal amount. Though it seems like a considerably smaller monthly repayment, it may not benefit the business in the long run. This business loan interest rate is optimal for those who use mortgages, have more cash flexibility, and want to keep the monthly costs low. The following method is used to calculate the monthly payments:
Loan payment = Principal loan x Annual Interest rate / 12
If you take a loan of INR 10 lakhs at an interest rate of 5% pa, you will have to make a monthly repayment of 4.166 INR. An interest-only loan gives you considerably lesser payments during the initial stage of the loan as you only repay the interest amount. The principal amount remains untouched. However, after the interest is paid during the initial years, the monthly payments will add up to higher amounts as you will start paying the interest along with the principal amount. Thus, it will not be very fruitful in the long run.
This loan gradually pays off the principal debt and interest as regular monthly payments. It is a beneficial way of reducing the interest amount as the business loan interest rate is calculated on the new principal balance. Amortized loans start reducing the principal amount from the loan repayment every month. The borrower makes monthly payments that apply to both the principal amount and the interest. Any extra payments or partial repayments of the loan in bulk will go towards the principal balance. The following method is used to calculate loan repayment:
M = P x (J / (1 – (1 + J) – N))
M – Loan payment
P – Principal amount
J – Interest rate
N – Total payments
You can use this to manually calculate the loan repayment amount for an amortized loan. The interest rate is usually decimals to arrive at the exact value. An amortized loan proves very beneficial in the long run when the borrower pays the principal amount along with interest periodically. This helps in loan prepayment or partial payment and is suggested to be the best choice for long-term loans.
Business loan EMI calculator
If you find both of the above manual ways of calculating a business loan stressful, then you can choose to calculate it with the help of a business loan EMI calculator. It is a simple, free and efficient tool that allows you to quickly check the loan repayment amount within a fraction of seconds. All you have to do is enter the correct numbers. It is, however, advised to use this tool as a checking measure and not to be relied on completely. Online calculators are simple to use and also arrive at the amounts that are approximately accurate in the calculation. Depending on this value, one can choose to pay early when the business is flourishing and extend the loan when the business is not ideal.
Before applying for and securing a loan, one must assess the cash flow of the business and its efficiency in making regular monthly payments while operating other expenses. Only with this, a business can be profitable in the industry. However, you cannot bite too much that can be chewed, so a loan should be taken with the most precautionary measures. The interest rate, type of loan – whether interest-only or amortized loan and the term for repayment play essential roles in repayment. A business loan interest rate in India is considerably low to facilitate the smooth running of business operations that, in turn, strengthen the economy.