Business loans are one of the best financial options small businesses can use to help them reach their financial goals. Businesses can use loan proceeds to invest in materials and supplies, meet temporary cash flow shortages and numerous other ways to ensure their business prospers.
You can ensure a business loan meets all your needs by fully understanding how they work. Read on to learn more about principal, interest, and other pertinent business loan details.
Simplified Loan Principal and Interest Details
Most business loans have these two main components: loan principal and interest. A loan’s principal is typically defined as the dollar amount you borrow. A simple example might be applying for a business loan of $35,000 to cover a temporary payroll shortage due to company growth. In that case, the loan principal is $35,000. Loan interest is the fee a lender charges for loaning the money. Lenders usually determine interest rates by the amount of money borrowed, the lender’s loan policies, and the borrower’s credit history. Good credit history can lead to lower rates.
Loan Principal and Interest Work Together
The following example explains how principal and interest work together if you accept a business loan for $35,000 with an annual 7% interest rate.
Once you receive the loan proceeds, you will start making payments on the $35,000 loan principal and interest. If your monthly payment is set at $650, the interest is $204 ($35,000 loan principal x 7% interest / 12 months).
Your $650 payment included $204 for the 7% interest fee and also $446 towards the loan principal. The good news? Your payment reduced your loan balance to $34,554.
Your interest rate will always be 7%. And, each month, a portion of the payment will reduce your loan principal and your loan balance – until you pay off your loan.
Monitoring Your Loan Principal and Interest
Each month, your lender will send you a monthly statement. You can ensure your loan details are accurate by monitoring your payments, loan balance, principal, and interest.
Additional Payments Are Worth It
Many lenders will allow businesses to make extra principal payments. This step will help pay down the loan balance sooner and reduce the interest paid over the loan’s life.
How Loan Principals and Interest Can Impact Taxes
Your business can deduct the loan interest paid throughout the tax year. However, you cannot deduct the loan principal since it is repaid, and the IRS does not tag it as earned income.
Financial Experts Can Improve Your Business Options
A business loan is an outstanding way to help your business reach its full potential. Get in touch with Scarlan Capital Group today to learn more about how a business loan will improve your business options.