As your business expands, so does its needs. At some point, you will require a business loan to help support the expansion needs. These loans have numerous benefits because apart from helping you grow your business empire, they can help you buy new equipment or even pay a nagging debt that may be detrimental to your business success.
There are different types of loans, and their affordability differs from lender to lender. As an entrepreneur, you should take finances seriously as this is what fuels your business. In your loan search, it is crucial to go for affordable loans only. Your revenue, cash flow, and your credit score should be the determining factor on loan affordability.
To avoid ugly scenarios of not being able to repay your loan, you have to ensure that the profits you expect from the use of the credit exceed your loan’s total cost. Your business should also generate enough cash flow that will cover the loan’s monthly payments. Before settling for a loan, you have to know the interest rates, the APR (the annual percentage rate), the expected monthly payment and the loan’s repayment period.
Calculating APR can be the most frustrating part in identifying loan affordability. A business loan calculator will help you do that much faster. APR may look like interest rate because they are all expressed in percentage form but the two are different. It also changes from lender to lender.
APR frequently include fees on top of interest rates such as origination fee or closing cost. It is the interest rate plus any fees associated with the loan. APR changes depending on the loan term and it is an accurate representation of the actual cost of capital. It will also help you compare two different lenders.
If for example, you have two lenders, both banks offer you an interest rate of 16%. Lender A offers an APR of 3.5%, and Lender B provides a rate of 1.5% as APR. It means that that creditor A will charge you 19.5% on the loan while lender B will charge you 17.5%. The real picture is that lender B is much cheaper than A.
APR alone should not be the determinant on which bank to settle for. Also keep the following points in mind:
1. The lender’s reputation
Dealing with a reputable person is easy. Get to know what other people think of the lender. If he has a good reputation, you may consider using him despite his APR.
2. Collateral requirement
Some lenders require guarantees before qualifying you for a loan while others don’t ask for it. It is safer to work with a lender who does not ask for collaterals just to keep your assets safe.
3. Pre-payment penalties
Some lenders will penalize you for clearing your loan before the loan term. Go for lenders who don’t charge you more for repaying your loan faster.
To calculate APR, the interest rate of your loan and monthly payments, you will enter your loan amount, the lender’s interest rate, the loan term and upfront fees and the monthly service charges. The results will help you identify if your loan is affordable or not. You monthly repayment rate, the amount the lender will charge you for the loan (interest), the total amount you will repay (i.e. the interest, principal, and fees) and the APR which s usually the annual cost of the loan.
This result will also help you identify which loan to go for. Short term loans usually have a higher APR, but that should not discourage you if you have a steady source of revenue. If the lender does not have a pre-payment penalty, you can quickly pay off the loan faster to save on higher interest rates and fees. Analyze the results well and use it to avoid going for loans that may seem cheaper while in the real sense may eat into your profits.
With the help of a business loan calculator, you should be able to make a financially sound decision on which loan to go for. APR will help you compare the different credit products, therefore, ensure that your lender makes it available to you.
Not sure how much it will cost you to get a loan from different lenders? Let us help you calculate the costs and find the best one
