Applying for a business loan? Do your math first!

If you are a business owner you know that investing is the best way to grow your company and gain new clients. The real challenge is knowing where to obtain the funding that allows you to invest in your business.

If you want to apply for a business loan you need to make sure the terms are convenient for you, but you should also research as much as you can in order to make the best choice.

Investment, interest, and gains

When considering a business loan you should ask yourself how much you are going to pay in interest during the life of the loan. You need to decide if it’s reasonable compared to other alternatives.

A fixed interest rate is better than an adjustable or variable one as it gives you additional confidence that the payments will not change as you improve your business. A low-interest rate is welcomed, but you should also base your choice on other considerations such as a quick approval period.

In addition to interest, you should be aware of other costs associated with the loan. Banks have a series of commissions that they charge when giving or administering a loan; you should know how much they add up to in order to have a clear idea of the total cost.

The most important aspect you should know is how much will your monthly payment be. You need to compare the revenues you’re going to gain from investing with the cost of the loan. It’s what we call Return On Investment, or ROI.

An accurate prediction about your gains is what’s needed to make the best choice. The ROI will help clear your mind and decide if requesting a loan is worth it and if you can make the payments consistently.

Santiago’s Business Expansion

We will consider the case of Santiago who has a clothing store. Business is going well but he considers expanding. He wants to open an adjacent store that will sell athletic sportswear and footwear.

He anticipates that the revenues from the second location will be higher than the initial one. He is considering a loan of $70,000 in order to pursue this plan. Santiago predicts that he will register $2,000 in monthly profits. He then decides that the best thing he could do before contacting a lender is to use a small business loan calculator. A calculator will help him get a clearer impression of the associated costs of the loan.

He uses the loan calculator and enters an interest rate of 10% that is compounded monthly. The loan term will be 10 years, and payments will be made monthly. There is an origination commission of 5% and a documentation commission of $750.

By using the business loan calculator Santiago learns that the monthly payment will be $925. This is well below 80% of monthly profits. The total cost of the loan is $111,000. The sum is also below the total profit the investment will bring over the specified period: $240,000.

If Santiago made his predictions correctly, he is in a position where he will not only gain a lot of new clients, but he will register considerable profits. The characteristics and figures he listed for the loan are realistic and he can easily change them to match the specifications of the loan he’s getting from the bank.

The revenues outweigh the costs even if he pays interest and commissions for the loan.

Santiago decided to take a loan. He has based this decision on strong arguments and good reasoning. Now he has the opportunity to improve his business and increase his revenues.

If you are a business owner you could most likely be in a very similar situation. It is understandable if you have your doubts, but these usually originate from uncertainty and not having the complete picture about the costs and process of applying for loans. Using a business loan calculator can help you to take the best decision in order to have a brighter future.