Table Of Contents
What Is A Business Loan Calculator?
A Business Loan Calculator is a tool designed to calculate the installment amount that one needs to pay back to the financial institution, who lends it that amount. These calculators are a subset of loan repayment calculators. A business loan calculator also helps compute, the interest amount already paid by deducting the total repayment amount from the borrowed amount.
Business loans can be taken in various forms like cash credit, cash flow loans, term loans, etc., and one discussed here was a term loan wherein the equal periodic installment is paid. Using the business loan calculator repayment tool, however, makes planning the repayments easier for individuals and entities, irrespective of the type of loan taken.
How Does A Business Loan Calculator Work?
Business loan calculators are designed to enable business entities calculate their repayment figures conveniently. Based on the annual percentage rates (APRs) that the business loans come with, these calculators compute the principal plus interest payments applicable for a loan type. From EMI business loan calculator to a calculator that lets borrowers find the already paid interest amount, these calculators come in various forms.
Business loan are quite commonly applied for as the business entities need frequent financing to carry out their everyday operations and also build and maintain their working capital. Thus, the availability of business loan calculators appear to be of great help to them. Once the required details are entered correctly, the calculator makes the computation and returns the required value instantly.
The calculator consider various components that users must know of before they use it and enter the asked details. It is important as incorrect details would lead to incorrect result generation, thereby affecting the financial planning of the businesses negatively. Some of these elements include the following:
- Loan amount: This is the amount that the businesses borrow. Every business entity is recommended to assess how much they should borrow to meet their ends. Just because business loans are available, they must not overborrow as overborrowing would lead to increased repayments.
- APRs: The annual percentage rate is the rate at which one gets the loan. These include all kinds of rates from interest rates to fee charges applicable. The applicable rates, however, vary based on the credit score of the entity or individual applying for the business loan along with the loan amount, tenure, and other factors directly or indirectly affecting the business’ credibility in any manner.
- Loan Term: This is the duration for which businesses require repaying their loan.
Formula
The formula on which this calculator is built has been mentioned below:
Wherein,
- L is the loan amount or borrowed amount
- r is the interest rate per annum
- N is the number of periods for which the loan will last for
- f is the frequency wherein the loan amount is to be paid
The Business Loan can be borrowed in many different forms, such as mezzanine financing, asset-based financing, term loans, cash flow loans, and business advance loans. The loans could be unsecured or secured. Some loans are collateralized, such as a machinery loan wherein the machine is kept as security and if the borrower defaults on the payment. The bank has the right to sell the machinery and collect the proceeds.
Therefore, if such extreme scenarios need to be avoided, one needs to know about their borrowing capability and financial condition and check whether they can fulfill the debt obligations. At the same time, check the amount of interest to be repaid. This calculator will help the business firms to calculate the installment amount and also interest by taking a total of installments paid and to be paid and deducting the same from the amount that was borrowed.
How To Calculate?
To ensure accurate calculation using this tool, one needs to follow the below steps in order to calculate the monthly installment amounts.
Step #1 - Determine the amount that needs to be borrowed by the business, which should be the principal amount.
Step #2 - Figure out the interest rate applicable for the loan taken.
Step #3 - Determine the periodical rate of interest. For example, if the interest rate is 8% and the same is to be paid monthly, then the interest rate would be 0.66% per month.
Step #4 - Multiply the initial loan amount by a rate of interest determined in step 3.
Step #5 - We need to provide the compounding effect of the same by the rate of interest calculated in step 3 until the end of the loan period.
Step #6 - As given in the formula, apply the discounting effect (denominator).
Step #7 - The resultant figure will be the periodical installment amount.
Examples
Let us consider the following instances to check how a commercial business loan calculator works:
Example #1
SNS is operating in a two-wheeler business and is currently facing liquidity issues due to long terms borrowed have been tied up in the plant and machinery. SNS wants to borrow $150,000 for 15 years. A bank is ready to offer the loan based on their long-term business relationship, as their credit score has also been maintained. Bank will charge a 6% rate of interest which shall compound monthly.
Based on the given information, you have been required to calculate the installment amount and the interest that the SNS would be paying on the same.
Solution:
We are required to calculate the amount of Installment, for which we will determine the loan amount to be borrowed, which is $150,000.
The period for the loan will last 15 years, but here, the firm will repay monthly. Therefore, the number of payments that SNS shall make is 15*12, which is 180 monthly installments, and lastly, the interest rate is 6% fixed, which shall be calculated monthly basis that will be 8%/12, which is 0.66%.
Now we shall use the below formula to calculate the monthly installment amount.
- = ($150,000 * 0.50% * (1 + 0.50%)^(15*12)) / ((1 + 0.50%)^(15*12) – 1 )
- = $1,265.79
Therefore, the Installment amount monthly will be $1,433.48, and the amount of interest that will be paid is $1,265.79 * 12 * 15, which is $227,841.34 less the initial principal amount, which is $150,000 that will be $77,841.34
Example #2
Machinery ltd is in a financial crunch, and it could declare bankruptcy if they don't get a loan. Since the risk is more for the banks, the state bank, one of the leading banks, has decided to grant loans in the form of a consortium, wherein multiple banks will provide a certain amount but at the same interest rate to avoid one bank's exposure to credit risk. Below are the details:
| Particulars | Amount |
|---|---|
| State Bank | $30,000 |
| Central Bank | $25,000 |
| City Bank | $15,000 |
| Union Bank | $10,000 |
| Total Loan Amount | $80,000 |
The rate of interest agreed upon is 9.77%, which shall be compounded and repaid quarterly, and the period will be for eight years.
Based on the given information, you must calculate the quarterly installment amount and the excess amount in the form of interest paid by Machinery ltd.
Solution:
We are required to calculate the amount of Installment, for which we will determine the loan amount to be borrowed that is $30,000 + $25,000 + $15,000 + $10,000 which shall equal to $80,000.
The period of the loan will last ten years. Still, since here the firm is going to repay quarterly; therefore, the number of payments that Machinery ltd shall make is 8*4, which is 32 equal quarterly installments, and lastly, the interest rate is 9.77% fixed, which shall be calculated every quarter that will be 9.77%/4 which is 2.44%.
Now we shall use the below formula to calculate the EMI amount.
- = ($80,000 * 2.44% * (1 + 2.44%)^8*4 ) / ( (1 + 2.44%)^(8*4) – 1)
- = $3,631.92
Therefore, the Installment amount quarterly will 3,631.92 and the amount of interest that will be paid is 3,631.92 * 8 * 4 which is $116,221.36 less the initial principal amount which is $80,000 that will be $36,221.36
Importance
Using this calculator enables businesses compute multiple things within minutes, once the details entered. If users enter the correct details related to the loan amount, APR, and loan term, they can easily retrieve the total amount to be repaid to their lenders. However, apart from this, the calculator can help in calculating other figures also.
Let us check the list of calculations in which this tool can help businesses:
- It can help calculate the exact APR based on the fees applicable along with the interest rates.
- This tool allows calculate the interest that one has already paid. This gives businesses an idea on how they should plan the next payment.
- The convenient calculation also helps users to compare different options based on their requirements even before they finally opt for a loan option.
- It also enables businesses to check if they are eligible to apply for a certain amount or not.
- The monthly payments along with the total repayment details can be obtained instantly.
