How to Use the Business Loan Calculator and Plan Your Financing
A business loan can be an invaluable tool to access the capital you need to grow your business. Our business loan calculator helps you plan your financing and figure out your monthly payment based on your loan amount, loan term, and interest rate.
If you plan to take out a business loan, use this calculator to determine how it will affect your overall business finances.
What Is a Business Loan?
Business loans provide funding to help businesses cover expenses, expand operations, or invest in growth opportunities. Whether you’re a brand-new business looking to get started or a well-established business wanting to invest in growth, a business loan could help.
Business loans come in many forms, including term loans, lines of credit, merchant cash advances, and SBA loans. Each loan type has unique features and benefits. Meanwhile, each lender sets its own terms regarding loan amounts, interest rates, and eligibility requirements.
Proper planning is key when considering taking out a business loan. It’s important to understand how business loans work, their benefits and downsides, and how to ensure you’re choosing the best loan offer for your situation.
How Do Business Loans Work?
If you’re planning on taking out a business loan, it’s important to understand how they work, including their key features and the factors that may affect your loan approval.
Key Components of a Business Loan
As you’re planning your business loan, here are some common features you can expect to see in your loan agreement.
Loan Amount
The loan amount is the total amount you borrow. The loan amount you’re eligible for will likely depend on your lender’s maximum loan limits, your creditworthiness, and your business’s annual revenue. Business loans can range from a few thousand dollars to millions of dollars.
Interest Rate
The interest rate is the cost of borrowing money, expressed as a percentage. This rate may be fixed or variable and is typically based on your creditworthiness. The better your credit, the lower the interest rate you can get.
Loan Term
The loan term is the duration over which the loan is repaid. Business loan terms often range from months to years. The longer the loan term, the lower your monthly payment will be, but the more interest you’ll ultimately pay.
Monthly Payments
Your monthly loan payments are determined by the loan amount, interest rate, and term. Depending on your interest rate and loan type, your monthly payment may be fixed or variable.
Collateral
Some business loans require collateral, which is an asset you’ll have to put up as security on the loan. The lender can seize your collateral, which is often property or equipment if you fail to repay your loan.
Personal Guarantee
Many business loans require a personal guarantee, meaning you agree to be held personally responsible for the loan if your business can’t repay it. Personal guarantees are especially common for newer businesses.
Factors Affecting Loan Approval
The factors determining your business loan approval are similar to personal loans. Here are some requirements to be aware of.
Collateral Requirements
Depending on your lender, creditworthiness, and business revenue, you may be required to offer collateral on your loan. Even if you aren’t required to have collateral, choosing to do so may help you land a better loan interest rate or larger loan amount.
Credit Score and Financial History
Just like with personal loans, a business loan lender will look at your credit score and financial history, including whether you’ve missed payments or defaulted on loans. The better your business (and possibly personal) credit, the better your chances of approval.
Business Revenue and Profitability
Business lenders assume you’ll be repaying your loan with your business revenue. As a result, many have minimum annual revenue requirements that your business must reach to qualify for a loan. The higher your revenue, the more you could potentially borrow.
Years in Business
Some lenders require that you have a certain amount of time in business before you can get a loan. For example, some lenders require six months, one year, three years, etc., in business before they’ll give you a business loan.
Find the Best Loan for Your Needs
If you’re considering a personal loan for your business needs, take a look at our listing and find a loan that makes sense.
Pros and Cons of Business Loans
Business loans offer plenty of benefits, including access to capital that owners otherwise wouldn’t have. However, there are also some downsides to consider.
Pros
- Access to necessary capital for growth and operations: If you’re hoping to grow your business, a loan can help you invest in additional inventory, equipment, employees, or further research and development.
- Potential to build business credit: Business credit can be difficult to build, especially for new businesses. As personal loans or credit cards help you build your credit, a business loan can do the same, giving you access to even more financing options later on.
- Flexible options tailored to specific needs: Countless business lenders offer various types of business loans. Because of the wide array of options available, business owners can find the best loan for their business.
Cons
- Interest and fees increase the cost of borrowing: Taking out a business loan costs money in the form of interest and fees. Depending on your creditworthiness and other factors, the loan costs could become too restrictive, forcing you to consider other options.
- Risk of debt if the business cannot repay: When you take out a business loan, you’re promising to repay the debt. If your business doesn’t perform as expected, you could find yourself unable to make your loan payments, which could affect your personal and business credit and cost you your loan collateral.
- Approval requirements may be stringent: Many lenders have stringent borrower requirements for business loans, including good credit, high business revenue, and several years in business. If you’re a new business without a record of success, you could struggle to get approved for a loan.
How to Use the Business Loan Calculator
If you’re planning to take out a loan for your business, here’s how your business loan calculator can help and how to get the best results.
Step-by-Step Instructions
- Step 1: Enter the loan amount you plan to borrow.
- Step 2: Choose the loan term (in months or years). Make sure to enter the loan term in the correct box, depending on whether it’s months or years.
- Step 3: Input the interest rate offered by your lender. This calculator assumes you have a fixed interest rate on your loan.
- Step 4: Review the estimated monthly payment, total interest paid, and the total amount (principal and interest combined) you’ll pay over the loan term.
3 Tips for Accurate Results
- Ensure you use realistic loan terms and interest rates: It may be helpful to do some research before using the calculator to get an idea of what the average loan term and interest rate is right now so you know what you might be eligible for. Using unrealistic numbers could make you believe you can afford a larger loan than you can.
- Include any additional fees or costs in your calculations: While our calculator doesn’t have a place to enter additional loan fees (unless they’re being wrapped into your total loan amount), you should still enter those into your personal calculation.
- Adjust the calculator inputs to compare different loan scenarios: Unless you’ve already received a loan offer, the numbers you’re entering are just estimates. It may be helpful to enter several scenarios so you can plan for your monthly payment, which could be given a higher interest rate, lower loan amount, shorter loan term, etc.
How to Choose the Right Business Loan
Before applying for a business loan, these guidelines can help you choose the best loan for you based on your unique situation and needs.
Evaluate Your Business Needs
Determine how much funding you need: Review your business’s finances to determine roughly how much you’ll need and what you plan to use the money for. Your lender may ask for details about how you’ll allocate the money, so be prepared to share that information if need be.
Consider how quickly you need the funds: Business loan funding times can vary from the same day to a week or more. If your financing needs are time-sensitive, make sure to look for lenders that look for same-day or next-day funding (though know this may limit your options).
Compare Loan Options
- Assess different lenders, interest rates, and repayment terms: Don’t simply apply for and take out a loan from the first lender you find. Instead, explore multiple options so you can compare various loan offers and find the best and most cost-effective one.
- Review the total cost of borrowing, including hidden fees: It’s easy to look at your loan amount or monthly payment and think that’s your total loan cost, but that’s often not the case. Make sure to factor in any other loan costs, including application fees, origination fees, late payment fees, prepayment penalties, and more.
When to Consult a Financial Expert
In many cases, you’ll be able to manage your business loan application yourself. However, working with a financial advisor can help you determine the best loan structure for your business needs. An advisor could help you upfront by interpreting calculator results and exploring alternative funding options. This may be particularly helpful if you’re new to business loans and want guidance to ensure you’re making the right decisions.
A financial expert may also be able to help you manage the funds once you’ve taken out a loan. This could be a good option if you’re taking out a large loan to help you with a business expansion project and you want to make sure all money is properly allocated.
Start Building Your Business’s Future Today
Business loans are powerful tools for growth, but careful planning is essential to maximize their benefits. Before starting your loan search, make sure to evaluate your business’s needs to ensure you’re borrowing the amount you need.
Then, you can use the business loan calculator to estimate your monthly payments and make informed financial decisions that set your business up for long-term success.
Once you’re ready to apply for a business loan, consider each lender’s requirements and loan terms and compare offers from multiple lenders to find the best offer for your growing business.
