It’s no secret that it takes money no make money. No matter what business you’re in.
As a business owner, you already know that a business loan is the best way to grow, expand or improve your business. But how much does it cost?
This is a question every small business owner will repeatedly ask themselves, and it’s certainly one of the most important questions.
If you are considering the idea of a business loan, and even if you already know the exact amount you need, you should also be able to answer these questions before applying:
- How much will you pay in interests during the life of the loan?
- Are there any other costs besides the interest? How much will they sum up?
- How much will you be your monthly payment?
Let’s take a look at an example
Orlando Ruiz is a Mexican entrepreneur. He has a small bar in Houston, TX.
His bar has been a favorite with real enthusiasts across the neighborhood since its launch in 2009, but now, after an increase of population in his neighborhood (especially families with kids), Orlando realized he wasn’t offering his clients the best customer service because he only sold alcoholics drinks and few little snacks. That’s why he decided to convert his small bar into a family restaurant.
If he wants to grow his small business he will need to take a business loan. Orlando needs to know whether or not he can afford a loan to purchase some new equipment and furniture for his family restaurant.
At the moment, his monthly net profits are $2,000 and he’s considering to borrow in a loan $10,000 in order to get at least $2,300/month after the investment (the expected return is usually based on historical data and is therefore not guaranteed).
To answer the questions below, he uses a commercial loan calculator before approaching a lender. Let’s see how it works:
There are 3 fields to be completed by Orlando using a dropdown menu:
- Loan amount: the amount he wishes to borrow. He enters $10,000.
- Payment term: Orlando can choose from a range that goes from 24 to 60 months (the terms offered by this specific lender)
- Monthly interest rate: this lender offers interest rates from 1% to 2.5%. Now, Orlando knows it won’t be up to him to decide the final rate that will be applied to his specific case if he proceeds and applies for a loan, but he thinks, considering his credit score and other factors, that 2% seems reasonable.
After using a commercial loan calculator, the results are:
|Number of Payments||36|
|Monthly Interest Rate||2.0%|
|Total Interest Paid||$4,123.83|
|Cost of the Loan||$4,822.83|
Should Orlando apply for a loan?
To know this, the business owner must make sure of the following:
a. The monthly payments don’t exceed 80% of his monthly net profit. Is that the case?
Yes. As you can see by the results above, Orlando has to pay $392,33 per month for his loan and this amount doesn’t exceed the 80% of his monthly net profit which is $1,600 (80% of $2,000).
Figuring out how much of his monthly income should cover his loan can seem overwhelming, that’s why using a commercial loan calculator can help Orlando to make the best decision for his situation.
Also, if his estimations are good, 80% of his monthly net profit will be even higher, because he expected to get at least $2,300/month after the investment, which is $1,840 (80% of $2,300)
b. The total cost of the loan doesn’t exceed the total return expected after the investment. Is that the case?
Yes. The total cost of the loan is $4,822,83 and doesn’t exceed his total return expected after the investment which is ($2,300 x 12 months) – $4,822,83 = $22,177.17
Getting a business loan could make a difference in your business, but it’s important to know the real cost of getting it and if you are going to be able to comfortably make your monthly payments. Also, there are closing fees, which can include other costs associated with servicing the loan.
This business owner decided to take the loan. He made an informed decision.
Are you in a similar situation and you still have doubts?
Then, use a commercial loan calculator to make sure you’re making the right move before approaching your lender.