How to calculate your business loan payments?
The calculator needs three numbers. Enter these details to estimate your loan payments.
Loan amount
Enter the total money you plan to borrow. Include every cost the loan will cover. For example, if equipment costs $40,000 and you need $8,000 for daily business expenses, enter $48,000. Borrowing less than you need may force you to apply for another loan later.
Interest rate (APR)
Enter the yearly interest rate charged by the lender. If you already have a loan offer, use the interest rate mentioned in the loan agreement. If you are still comparing lenders, SBA loans often range between 10.5% and 13%. Online lenders may charge higher rates.
Loan term
Enter the term of the loan. A $50,000 loan at 10% interest for 3 years with monthly payments would be $1,613.00 and $8,072.24 in interest. If the term of the loan were increased to 5 years, the monthly payment would be $1,062.00, and $13,748.27 in interest.
How to figure out how much loan you can afford?
First, calculate your monthly cash flow reserves by taking a close look at your business’s residual income, which is the amount of money available to you every month after paying all operational expenses. This should remain between 35% and 40% of the overall monthly revenue.
A good example would be if your business had $12,000 in monthly revenue and the monthly loan repayment was $4,500. In this scenario, the cash flow is highly committed, and you will have very little liquidity to manage a short-term decline in revenue.
Now, it’s time to run a stress test. Assume revenues are 20% less for two months. Can the rent, payroll, and loan be paid? If not, consider taking less of the loan or longer terms. Taking a loan that the business cannot repay during slower months can create serious financial problems.
What do lenders look at before approving your loan?
Lenders are trying to answer one question: Will this business pay us back? To decide this, they review several factors about the business and the owner.
1. Credit score
Most traditional lenders want the owner’s personal credit score above 680. SBA lenders often require 700+. Online lenders go lower, but charge higher rates in return.
2. Time in business
Two years is the standard threshold for bank loans. Under that, your options are SBA microloans, CDFI lenders, or online lenders.
3. Revenue and cash flow
Lenders prefer to have their debt service coverage ratio maintained at 1.25 times, which requires your net operating income to exceed your loan payments by 25 percent.
4. Collateral
Some lenders require borrowers to provide collateral, which can include equipment, property, or inventory to secure their loan.
5. Business plan
A clear plan that demonstrates the intended loan usage and repayment strategy has substantial value as a business plan.