If you’re like most small businesses, at some point you are going to need funding. This funding will likely come from a business loan. However, before you get started, you must understand a few things.
In this blog, we’ll explain what you need to know about business loan principal, including how it works and where you can find it.
What is Loan Principal?
The total balance of a business loan is comprised of the loan principal and the interest charges. The principal is the amount of money borrowed on the loan. For example, if you take out a $40,000 loan to purchase equipment for your business, the principal is $40,0000.
Therefore, while the interest charges increase the balance of the loan, the principal remains $40,000. As you make payments on the loan, the principal will go down.
Principal vs. Interest
It’s important to note that lenders do not lend out money for free- they need to make a profit off the loan. The interest is how they make their money- it is the cost of borrowing from them.
The loan principal is a dollar amount, but the interest is a percentage based on your credit history and the lender’s policies. Most of the time, a higher credit score and stronger credit history result in a lower interest rate. Therefore, it’s essential to check your credit before applying for a business loan.
How Does Loan Principal Work?
In the example listed above, the loan principal is $40,000. Let’s say your annual interest rate is 6%.
When you receive your funds and start making your payments, the principal is still $40,000 but the interest on it is $2,400. You will make $800 payments each month, with $200 going toward the interest and $600 toward the principal.
Once your first payment goes through, your principal will drop to $39,400. As you continue to make payments, this amount will decrease.
Can You Pay Off a Business Loan Early?
Most lenders will allow you to make extra payments on your loan, which will reduce the loan principal faster. By doing this, you can:
- Save on interest
- Shorten the term of the loan
- Gain peace of mind
Loan Principal and Taxes
Most small business owners are always looking for ways to save money on their taxes. It’s important to note that you may be able to deduct interest paid on a loan, but you cannot deduct the loan principal. This is because the loan is used to benefit the business and will be paid back.
Ready to Get a Business Loan?
Before you accept a business loan offer, make sure that you understand the repayment process. You may also want to learn more about your options to make sure that you get the best deal. If you need help or you’re ready to move forward, contact Scarlan Capital Group today. We can help you get the funds you need for your business.