Calculating The Cost Of A Small Business Loan
Are you a number’s person? If your answer is “no”, you are not alone. Most people find numbers boring, if not terrifying. Yet numbers are important, especially when you run a small business. Are you planning an expansion or need cash in hand to run your daily operations? In cases like these, you always have the option to get a business loan. And to make sure this is the right choice, you’ll need, again, to crunch some numbers. Do you know beforehand how much that loan is going to cost you? What is the total amount of interest you will pay? Are there any other costs? How much will you pay per month? You can’t deny it: you need to know your numbers to make the informed decisions that will keep your business alive and strong.
Use this tool to do your math
So, how can you calculate the total cost of a loan? I prefer the simple way: using a very convenient tool that does the math for me. I’m talking about a small business loan calculator online. Let’s see this better with an example. Marian is the owner of a pet shop. She loves animals and cannot wait to see them in warm houses, so she usually sells below the target price, getting often into financial trouble. She asked me for advice, and I gave it to her. We prepared an action plan that would allow her not only to sell pets, but also offer a wide range of care services. Of course, that plan had a cost… $10,000. We estimated that her net profit per month was around $580 and she was worried that it was not enough. I showed her how to use a simple business loan calculator and we studied the possibilities. She could get a loan for 2% per month, with a $700 closing fee. So, we input the data on the calculator and selected 24 months to pay it back. Result: monthly payments of $530. Was that a payment that she could comfortably make based on her monthly income of $580? It was a stretch. The rule of thumb is to make sure that your monthly installments do not exceed 80% of your monthly net profit. So, we run the business loan calculator again. This time we selected a loan term of 36 months, and the monthly installments resulted in less than $400. From 91%, we went down to a comfortable 69%. Now Marian is sure she can make those monthly payments without stretching her budget. One last thing: make sure you will get more money from the investment than the one you must pay. Once the investment is done and after the 36 months of the loan term, Marian expects a profit of $9,000. The total cost of her loan is $4,825. That means Marian’s profit will almost double her investment. With these terms, she can clearly take the loan.
Marian decided to take the loan based on the information she got at a glance from the small business loan calculator. Like her, you can easily run your numbers to arrive at an informed decision about a possible business loan.