The Cost of Your Business Loan—Explained

When you contemplate getting a business loan, do associated costs loom over you like Yeti, the mythical creature of folklore? These costs seem huge until you understand that they aren’t as nebulous as they seem. So what’s the 411? Entrepreneurs apply for a small business loan to grow and expand their businesses. Before they ever commit to borrowing money, they want to see on paper the total interest paid, the monthly payment amount, and other associated costs. Because business owners know they need to spend money to make money, it’s important to have more answers than questions before committing to a financial agreement with a lender. Here’s a hypothetical example of a Hispanic business owner who used a commercial loan calculator before he ever approached a lender.

Alejandro Never Wondered about Business Loan Costs

After running a successful taxi service for over 10 years, Alejandro employed several drivers and made about $1,500 in profits per month after expenses. With a new airport being constructed in his community, he saw an opportunity to increase revenue. Even though he was a good money manager, he owed more debt than he wanted. In addition to paying off debt, he decided to add to his existing fleet of vehicles. By doing so, he could stay competitive in his field of expertise. The next logical step was to apply for a small business loan, but he had no idea what costs to plan for. He consulted with another business owner who suggested he used a  small business loan calculator to determine how much money Alejandro’s business could comfortably afford. By using the financial tool, he could input the loan amount and select repayment terms between 24-60 months as well as a range of interest rates. He jotted down notes before resetting the calculator and inputting different information. Each time, the calculator displayed the monthly payment, closing fees, and the total interest paid. Alejandro decided to borrow $25,000 spread over 3 years to stay ahead of the competition and pocket more profits. A $904 monthly payment was doable as well as a closing fee of $1,748 and interest amounting to $7,537 paid over the life of the loan.

Is There Anything Else Alejandro Should Consider?

In addition to knowing the business loan costs beforehand to tailor the loan to his specific business, Alejandro should ask himself these two questions before applying for a loan.

  1. Do monthly payments exceed 80% of the monthly net profit?
  2. Do total loan costs exceed the total return expected after the investment?

Alejandro estimates that his monthly profit will be about $1,085 so the monthly payment of $904 meets the requirement that it doesn’t exceed 80% of monthly net profits. When he pays off the loan, his total profit will be about $4,775. Based on Alejandro’s profit estimates, he shouldn’t hesitate to go forward with the loan as the numbers indicate it’s a safe and wise investment.

Business Loan Costs Don’t Need to Tower over You

As you can see above, Alejandro gained peace of mind by knowing the real costs of getting a loan before he signed any documents. He’s comfortable with the monthly payment amount and can see his business growing by leaps and bounds. He knew, without a doubt, that a short-term loan was right for his business. Alejandro felt in control of the loan process by crunching the numbers and making an informed decision. Maybe your business needs an injection of cash to propel it forward. Just like Alejandro, you can move ahead confidently by using a commercial loan calculator and see instantly what you can afford and what you can’t. After all, slaying a loan cost monster is as simple as using a calculator.