In the United Kingdom, financial institutions that lend money for business or commercial purposes are not mandated by law to disclose their annual interest rates. They are not even required to provide a benchmark rate for funding.
This is because currently lending for business purposes is not regulated. For this reason, many small to medium scale enterprises or SMEs end up biting off more than they can chew when it comes to loans and therefore SMEs which do not have the deep pockets of large companies are not getting the best value for their money.
Loan term (years)
Why Use A Business Loan Calculator
We value the contributions of the SMEs to the UK’s economy and instead of capitalising on their need for business funding, our position is to help them gain every possible advantage in securing the best lending arrangement to cover their financial needs and ultimately reach their business goals.
In our opinion, lenders present their lending packages from a marketing standpoint and not a business standpoint. The message often presents a rosy picture of what the loan can do but not how much the cost of the loan will impact on the business’ cash flow. The business should have the full knowledge of how much they will be paying before agreeing to the terms of the loan.
We created the Business Loan Calculator to give SMEs a tool they can use to compare loans by applying various interest rates. Our business loan calculator will help SMEs to understand the actual cost of what they will be paying for should they require funding. By using our business loan calculator, the SME will gain better clarity on the loan offer and arrive at a numbers-based decision on which package to accept.
Factors When Calculating Business Loan Rates
Business loan rates calculators can be helpful tools for estimating the cost of borrowing and understanding the financial implications of taking out a business loan:
The principal amount is the initial sum of money you borrow from a lender for your business needs. This amount is a crucial factor in determining the overall cost of the loan, as interest rates and repayment terms are often based on the principal. When choosing a loan, carefully consider how much money you need for your business plans, and aim to borrow only the amount necessary to avoid paying unnecessary interest.
The interest rate is the cost of borrowing money, expressed as a percentage of the principal amount. It is typically quoted as an annual percentage rate (APR) and influences the total cost of the loan over its term. Higher interest rates result in higher costs for borrowing money, while lower interest rates reduce the overall cost. Different lenders offer various interest rates based on factors such as creditworthiness, loan type, and market conditions. It’s essential to compare interest rates among multiple lenders to find the most competitive rate for your business loan.
The loan term is the length of time you have to repay the borrowed amount, including interest. Loan terms can vary widely, from short-term loans of a few months to long-term loans lasting several years. The loan term affects both the monthly repayment amount and the total interest paid over the life of the loan. Generally, shorter loan terms result in higher monthly payments but lower overall interest costs, while longer loan terms lead to lower monthly payments but higher total interest costs. Choose a loan term that balances affordability and overall cost based on your business’s financial situation and goals.
Repayment frequency refers to how often you make payments on your business loan. Common repayment frequencies include monthly, quarterly, and annual installments. The repayment frequency affects the loan’s cash flow impact on your business and the total interest paid over the loan term. More frequent payments typically result in lower overall interest costs, while less frequent payments may be easier to manage from a cash flow perspective. Consider your business’s cash flow and financial management when selecting a repayment frequency that suits your needs.
Fees and Charges
Fees and charges are additional costs associated with a business loan, separate from the principal and interest. These may include origination fees, application fees, prepayment penalties, late payment fees, and other charges imposed by the lender. Fees and charges can significantly impact the overall cost of a loan, so it’s crucial to understand and compare them when evaluating loan options. Look for lenders with transparent fee structures and competitive pricing to minimize the cost of borrowing.
An amortization schedule is a detailed breakdown of each loan payment over the loan term, showing the portions allocated to principal repayment and interest. This schedule helps you understand how much of each payment contributes to reducing the principal balance and how much goes towards interest costs. An amortization schedule can be a valuable tool for budgeting and financial planning, as it provides a clear picture of how the loan will be repaid over time.
Total Interest Paid
Total interest paid is the sum of all interest charges over the life of the loan. This figure is an essential consideration when evaluating the overall cost of borrowing, as it directly impacts the loan’s affordability. To minimize the total interest paid, consider choosing a loan with a competitive interest rate and an appropriate loan term that balances monthly payment affordability and overall cost.
Comparison of Lenders
Comparing loan offerings from different lenders is crucial to finding the best business loan for your needs. Lenders may offer varying interest rates, fees, repayment terms, and eligibility requirements. When comparing lenders, consider not only the financial aspects of the loan but also the lender’s reputation, customer service, and any additional services or benefits they provide. Use loan calculators and other tools to compare the overall cost and terms of loans from multiple lenders before making a
EMI (Equated Monthly Instalment)
In finance, EMI stands for Equated Monthly Installment. It is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. EMIs are used to pay off both the principal and interest on a loan over a predetermined period, making loan repayment more manageable for the borrower.
EMIs are commonly used for various types of loans, such as home loans, car loans, and personal loans. The EMI is calculated based on the loan amount, interest rate, and the loan repayment tenure. The formula to calculate EMI is:
EMI = P × r × (1 + r)^n / ((1 + r)^n – 1)
- P represents the principal (loan amount)
- r represents the monthly interest rate (annual interest rate divided by 12)
- n represents the total number of monthly installments (loan tenure in months)
By paying EMIs, borrowers can gradually reduce their outstanding loan balance over time, eventually paying off the entire loan at the end of the repayment period. The EMI structure helps borrowers plan their finances, as they know the exact amount they need to allocate each month for loan repayment.
How Is The EMI Calculated
The Business Loan Calculator uses an algorithm that turns an offer for a business loan into a wider range of rates. A business owner will be able to compare various rates and see which ones are the most advantageous. When using the Business Loan Calculator, here are a few things that you need to keep in mind:
- The numbers that are presented by the Business Loan Calculator are only cost estimates of a business loan quote. It does not take into consideration any criteria that are used by the lender to determine who can borrow money.
- The numbers are calculated based on the data provided by the user.
- Please keep in mind that the Business Loan Calculator will not determine whether you qualify for a loan or not. You will still have to comply with the criteria provided by the lender.
- The figures presented as payments every month are based on the idea that the amounts paid out will remain the same at the end of every month.
- The figures presented have already factored in other fees that you have to pay every month.
- The Business Loan Calculator assumes that the rates will remain the same for the duration of the entire term of the loan.
The Business Loan Calculator functions as a guide. When making a decision on financial matters, you may wish to consult with a professional or experienced financial manager.
Definition Of Terms For Loan Rates
Here are popularly-used terms when discussing business loan rates. We’ve taken the time to present their respective definitions so that you can fully understand the loan proposal and make the best decision for your business.
Annual Interest Rate
The actual cost of funding the loan over the length of its term presented as a percentage. The annual interest can worked out by simply multiplying the rate charged on the loan per month with the total number of payments made within a year.
The total amount of interest paid within a year that is presented as a percentage of the amount of the loan. You can arrive at the number by simply dividing the amount of interest paid in a year by the total amount funded.
The cost of the loan. The Factor Rate is commonly identified with merchant cash advances, a process which offers funds to businesses in exchange for a percentage of the credit card income accumulated on a daily basis. It is not presented as a percentage but as a decimal that usually ranges from 1.1 to 1.5.