Whether the business can carry the repayment
A business loan is judged differently from a consumer one. The lender is not asking what you earn but whether the trading cash flow covers the instalment with room to spare.
The instalment below is the number that goes into that test. Lenders commonly want operating cash flow of at least 1.25 times the annual debt service before approving.
The formula behind the number
An amortising loan is repaid in equal instalments. Each one covers the interest that accrued since the last payment, and whatever is left reduces the balance. The instalment that brings the balance to exactly zero on the final payment is:
Here P is the amount borrowed, i is the monthly rate (the annual rate divided by 12) and n is the number of payments. Nothing else enters the calculation, which is why two lenders quoting the same three inputs must arrive at the same instalment.
Worked example: $100,000 at 9% over 5 years
The calculator opens on this scenario, so you can follow every step:
- Amount borrowed: $100,000
- Annual rate: 9%, so the monthly rate is 9 ÷ 12 = 0.7500%
- Term: 5 years, so n = 5 × 12 = 60 payments
Paying $2,075.84 every month for 60 months comes to $124,550. Subtract the $100,000 you actually borrowed and the cost of the credit is $24,550, or 25% of the sum borrowed.
Where each payment goes
The instalment never changes, but its composition does. The first payment carries $750.00 of interest and only $1,325.84 of principal. By payment 30 the split has moved to $429.20 interest against $1,646.63 principal.
| Payment | Instalment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $2,075.84 | $750.00 | $1,325.84 | $98,674 |
| 2 | $2,075.84 | $740.06 | $1,335.78 | $97,338 |
| 3 | $2,075.84 | $730.04 | $1,345.80 | $95,993 |
| 30 | $2,075.84 | $429.20 | $1,646.63 | $55,581 |
| 60 | $2,075.84 | $15.45 | $2,060.38 | $0.00 |
Interest on a business loan is usually deductible, so the after-tax cost of the interest column is lower than it appears. The principal column is not deductible.
What moves the answer most
Two levers change the total, and they do not pull with equal force.
Add one percentage point to the rate and the instalment goes from $2,075.84 to $2,124.70, which is $2,932.14 more over the full term. Cut 2 years off the term instead and the instalment rises to $3,179.97, but total interest falls from $24,550 to $14,479. A shorter term saves interest but tightens monthly cash flow, and for a business the cash flow constraint usually binds first.
What this calculator leaves out
Personal guarantees, covenants, arrangement fees and any requirement to hold a compensating balance are excluded. These often matter more to the decision than the rate.
Related calculators
- Debt service coverage calculator — the ratio the lender will apply
- Cash flow to debt calculator — how many years of cash flow the debt represents
- Break-even calculator — the sales needed to cover the new fixed cost