How to Know All the Costs of a Small Business Loan

As a small business owner, you must have wondered about the solutions available to increase your capital and improve your business. You have considered about applying for a small business loan, but you probably were unsure because of all the related costs. We are here to help you. Learn here the most important aspects of a business loan and how to use a business loan calculator to understand the true costs.

It is good to know all the information about a loan, in order to not be surprised by the evolution of the markets and the interest rates. A fixed interest rate is the choice if you want to minimize risks. There are also loans that have an adjustable interest rate or a variable interest rate, so they are a good choice if the borrower estimates that the interest rate will decrease over a period. However, you should probably choose a fixed interest rate, as this does not require that you estimate the market evolution. You should also be aware that besides interest, there are other costs as fees and commissions.

Working Capital and Small Business Loans

Working capital is the cash available to finance a company's short-term operational needs. However, sometimes a company does not have the adequate cash on hand or asset liquidity to cover daily operational expenses and, thus, will secure a loan for this purpose.

A working capital loan is a loan that is taken to finance the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are, instead, used to cover accounts payable, wages, etc.

If you need working capital for your small business you have the option to apply for conventional loans that are offered by banks and financial institutions. The interest rates for this loan can vary, so if you have a good credit score you will pay a reduced interest rate, while if you have a bad credit score you will pay an increased interest rate. But be cautious: the vast majority of banks want to secure their loans with some sort of collateral like real estate, equipment, or other valuable business asset that you have.

As an alternative, you can turn to an online lender. Online lenders have become increasingly popular since, as opposed to banks, they offer unsecured small business loans. An unsecured business loan is a loan that requires no collateral but is rather based solely upon the creditworthiness of the small business borrower. Also, the application process with an online lender is easier as in a bank, requiring less time and paperwork.

Regardless of the type of loan, the borrower has to know all the characteristics about it in order to take an advised decision while relying on complete information. An aspect that is especially important is the annual percentage rate (APR). It is an indicator that shows the percentage of all costs of a loan in a year, including origination fees and commissions.

The internet is a great place to start to find plenty of information about small business loans and all the aspects and requirements they involve.

Calculate your Loan Repayment with a Business Loan Calculator

The best choice when applying for a loan is a financial institution that has a great degree of transparency and discloses all the relevant information so that there are no misunderstandings later on. You have a lot to lose if the contract has a number of hidden clauses or concealed information, especially on the long term. The best financial institution to obtain a loan from has to be a trustworthy business partner. You should see if you are a part of the customer target group, as this will make it easier to obtain the loan or will allow a series of better terms. You should be on the lookout for financial institutions that cater to a specific ethnic group, as if you are a member of that ethnic group you could obtain a number of advantages when applying for the loan as the company is used to work with that segment of people. Also, nowadays online lenders are a great alternative offering small business loans through a more simple process than traditional bank, and with less requirements.

If you want to see the exact schedule of repayment, a loan calculator is a useful instrument to do so. An example is the Business Loan Calculator available on the Camino Financial page. It allows you to introduce multiple parameters to compute the monthly rate of a loan designed especially for you. An important aspect you have to keep track of is if the loan is amortized, because this means that the principal to be repaid diminishes over time. It is important for you, as it allows you to pay a reduced amount of interest over the entire period. This means that even if the rate is fixed, you will pay less interest and more principal as the time passes. The business loan calculator offers a lot of information about the costs of a loan and should be used before applying as it is a way to ensure that the payment calendar can be achieved.

Let’s see an example to show how easy the calculator is to use. Let’s say I want to renovate my office space and I need $20,000 to do so. These are the figures I would enter in the calculator:

  • Loan Amount: $20,000
  • Payment Term: 36 months (you can pick a range between 24 to 60 months)
  • Monthly Interest Rate: 1,25% (you can pick a range from 1 to 2,25%)

And these are the results I get from the calculator:

  • Closing Fees: The amount of closing fees I’ll pay on the loan. This amount is deducted from the loan amount on the day it is funded. In my case the amount is $1,398.
  • Total Interest Paid: The exact amount of interest that I’ll pay during the full term of the loan. The calculated interest I would pay is $4,959.04.
  • Cost of the Loan: How much the entire loan will cost me, including the closing fees and total interest to be paid. The sum of both figures in my case is $6,357.04.
  • Monthly Payment Amount: The amount that I’ll pay monthly for the loan. My monthly payment would be $693.31.That’s actually the key figure. Now I have to thoroughly consider if I can pay that amount monthly and if I feel comfortable doing so.

If I’m not satisfied with the results, I simply click “Reset Calculator” and start over until I get the figures I feel comfortable with. By using the calculator, I can now contact my lender comfortably and ready to start my loan application process.

Mavris Florin

Marvin writes for Camino Financial, an online lender for small business loans. Mavris has a background in finance and economics. In these fields of research he writes about theoretical topics and ideas. He also deals with cryptocurrency, consumer psychology and technological advancements in banking and financial instruments.