Business Loan Calculator

How to use this commercial business loan calculator

This commercial business loan calculator estimates the repayments on a standard term loan, the kind where you borrow a lump sum and repay it in equal installments over a fixed period.

1. Loan amount. The amount you plan to borrow.
2. Annual interest rate. The yearly rate the lender quotes, in percent. Enter 0 for an interest-free loan.
3. Loan term. Enter it in years or months, whichever your offer uses.
4. Payment frequency. Monthly is most common. Some online lenders collect every two weeks or weekly.
5. Origination fee (optional). A one-time fee, quoted as a percent of the loan, that many lenders charge to set up the loan.

The results show your payment per period, the number of payments, total interest, the fee in dollars and the total cost of the loan. Open the amortization schedule to see how each of the first 12 payments splits between principal and interest, plus a year-by-year summary.

The loan payment formula

Fixed-rate term loans use the standard amortization formula:

Payment = P x r / (1 - (1 + r)^-n)

Where P is the loan amount, r is the interest rate per period (the annual rate divided by the number of payments per year) and n is the total number of payments.

Worked example: $50,000 at 8% over 5 years

• P = $50,000
• r = 8% / 12 = 0.6667% per month (0.0066667)
• n = 5 x 12 = 60 payments

Payment = 50,000 x 0.0066667 / (1 - 1.0066667^-60) = $1,013.82 a month.

Over 60 months you pay $60,829.18 in total, so the interest cost is $10,829.18. In the first month, $333.33 of your payment is interest (0.6667% of $50,000) and $680.49 reduces the balance. By the last year, almost all of each payment goes to principal.

If the rate is 0%, the formula simplifies to the loan amount divided by the number of payments: $12,000 over 12 months is $1,000 a month.

Business loan repayments by frequency

Paying more often can lower the total interest a little, because the balance falls sooner. Here is the same $50,000 loan at 8% over 5 years:

The difference is small at the same annual rate. What matters more is how the lender quotes the rate. Some short-term lenders quote a "factor rate" (for example 1.2, meaning you repay 1.2 times the amount borrowed) rather than an annual rate. A factor rate of 1.2 on a 12-month loan works out to a much higher annual rate than 20%, so convert it before comparing offers.

How fees change the real cost

An origination fee is usually deducted from the money you receive or added to the balance. Either way, it raises your true cost of borrowing.

Say the $50,000 loan above has a 3% origination fee. That is $1,500, so you only receive $48,500 but still repay $1,013.82 a month. Spread over the term, the effective annual cost rises from 8% to roughly 9.3%. The calculator estimates this for you in the spirit of an APR (annual percentage rate). It is a helpful comparison number, not the official APR a lender must disclose, which can include other charges.

Before you sign, ask every lender for:

• The annual interest rate and whether it is fixed or variable
• All fees: origination, packaging, closing, late payment and prepayment penalties
• The total amount you will repay over the life of the loan

Small business loan calculator tips

• Run several scenarios. Try a shorter term to see how much interest you save, and a longer one to see how much it lowers the payment.
• Check affordability against cash flow, not profit. A profitable business can still struggle to make loan payments if customers pay slowly. Your cash flow statement shows whether there is room in the budget.
• Know what lenders will ask for. Most want recent financial statements, a profit and loss statement, a balance sheet and bank statements. Clean, reconciled books make the application faster.
• Plan for variable rates. If the rate can change, rerun the numbers with a rate 2 to 3 points higher to make sure you can still afford the payment.

Common types of business loans

The calculator fits any loan with a fixed rate and equal payments. Here is how common products compare:

• Term loans from banks and online lenders: a lump sum repaid over one to ten years. This calculator is built for them.
• SBA loans (in the US): government-backed loans from approved lenders, often with longer terms and lower rates, but more paperwork and a slower approval.
• Equipment financing: the equipment itself secures the loan, and the term usually matches its useful life.
• Lines of credit: you draw and repay as needed and pay interest only on what you use. Payments vary, so a fixed-payment calculator only estimates one draw.
• Merchant cash advances: repaid as a share of card sales and priced with a factor rate. They are not loans in the usual sense, and the effective annual cost can be very high.

Whatever the product, compare offers on the same basis: the total you will repay and the effective annual cost, not just the payment size.

Recording a business loan in your books

A loan is not income, and repayments are not entirely an expense. In double-entry accounting:

• When you receive the money, debit your bank account and credit a loan liability account.
• Each payment splits in two: the principal part reduces the loan liability, and the interest part is recorded as an interest expense on your profit and loss.

The amortization schedule from this calculator shows that split for every payment, which makes the journal entries easy. In PilotLedger you can set up the loan as a liability in your chart of accounts, record each payment against it, and reconcile your bank account so the loan balance always matches the lender's statement.