There is no denying that a loan can be a game changer for your company. If yours is a small business, a loan can help you grow in ways you never thought possible. Given the fact that you need money to make money, it is no wonder that most successful businesses today depend on loans to expand and reach new heights.
While the importance of a business loan cannot be underrated, it is also necessary to remember that every loan comes at a cost. Once you have decided the exact amount of loan you need to grow your business, you need to consider the cost of the loan.
So, just how much is the cost? How much will you pay monthly and what interest will you pay at the end of it all? Are there other costs other than the interest? What are these costs and how much is the overall amount?
Before approaching any lender, you will need to calculate the estimated costs. This way, it will be easy for you to tell whether the loan will do any good for your business. Negotiating for better terms is easy when you know the costs involved.
Let’s See an Example
Consider the case of Carlos Castro, the founder of Todos Supermarket. Despite the fact that this is a multi-million-dollar company, it is still classified as a small supermarket chain. Yes, the growth has been steady but the owner thinks it is time to give the business a major boost.
A look at the accounts indicates that the current net profit stands at $60,000 per month. Let us say Carlos wants to continue expanding his business. He needs about 1 million dollars to do this and because of his track record, he is sure that most if not all lenders will be more than willing to advance such a loan to his business.
He does some research and discovers that his preferred lender can advance the loan at 1.5 % monthly interest and repayment of 3 years. By the end of 3 years, which is the term of the loan, he expects to make at least $500,000. He knows that the loan will have a far-reaching impact on the business and if used right the loan will benefit his business.
So, is the loan a good idea for Todos Supermarket and what are the costs associated?
To answer all the questions above regarding the costs of the loan, Carlos uses a commercial loan calculator.
Commercial Loan Calculator Results
|Number of Payments||36|
|Monthly Interest Rate||1.5%|
|Total Interest Paid||$301,486.24|
|Cost of the Loan||$351,486.24|
Ideally, the monthly repayments for the loan should never be more than 80% of your net profit. So, is that the case here? Yes, the repayments will just be a fraction of the monthly net profit. Therefore, the business will be comfortable making the monthly repayments. According to monthly net profits, this will have no effect on the regular business operations, as the profits are able to cover any emergencies that may arise.
The total cost of the loan should also not exceed the return expected after the investment. Is this the case here? Yes, Todos Supermarket stands to gain more from the loan both in the short term and in the long run.
To Sum Up
Any seasoned business owner will tell you that loans are the quickest way to grow when you have a small business. As long as your business has some element of stability and you have lenders who are willing to grow with you, there is no reason why you should not get a business loan.
Want to get a loan for your business? Consider the real cost of getting it and go for the option that best favors your business. Consider the monthly repayments and ensure that the monthly repayments will be manageable. If repayments are unmanageable, then you are better off without the loan as eventually, it will have a negative effect on your business. Also, make sure the total cost of the loan doesn’t exceed the return you expect to get from your investment.
Use a commercial loan calculator to make sure you are making the right move before approaching your lender. Analyze the results and only apply for a business loan when you are sure that you can manage to pay back the loan without negatively affecting your business operations.