If you have your own company, chances are that you are already working on the next step in your head. With a growing company, you cannot always pay for investments out of your own pocket: a business loan offers a solution. If you are considering applying for a loan, you first want to know what this means for the financial situation of your company: how do I repay the loan, what is my monthly amount and over what period do I pay off? In this article you will read everything you need to know about paying back your business loan, paying off early and what costs you can deduct from your profit. In this way you know exactly where you stand and you can consider whether an SME loan suits your company.
Repaying a business loan: this is how it works
When you take out a loan for your company, you always make agreements about how you will repay. The most common form is a linear business loan, where you pay interest and repayment every month. You immediately start paying off. The composition of your monthly amount changes: in the beginning you pay more in interest and then the repayment part becomes higher. Good news: at the end of the term you have fully paid off the loan through your monthly repayments. Less common is the business annuity loan, where you initially only pay interest and no repayment on your loan. This loan form can be interesting if you want to be sure about your monthly amount, since you pay the same amount every month.
Example business loan
You borrow USD 54,000 with a term of 3 years. For this you pay a monthly installment and a partial interest for this. With an interest rate of 3.1% in the first month you end up with the following costs on average:
- USD 1,500 repayment + USD 46.50 interest = USD 1546.50 per month
With an interest rate of 9.1% you end up with the following monthly payments:
- USD 1,500 repayment + USD 136.50 interest = USD 1636.50 per month
You pay repayment from the first month, which means that your monthly expenses will continue to fall.
What is the duration of a business loan?
The term of your loan usually depends on the intended financing objective. For example: real estate financing has a longer duration than financing for a car. If your loan has a short term, you repay more each month and your monthly amount goes up. You cannot withdraw the amount that you have repaid. If you want to withdraw money flexibly to pay for your daily expenses, a business credit suits your situation better.
Early repayment: what does this mean?
For many entrepreneurs, the income can vary quite a bit, especially if your company is in the growth phase. If you have extra financial resources available, you want to be able to repay your loan early. What are the benefits of early repayment? In general, early repayment on your loan can be smart: the interest you pay on the borrowed money is usually higher than the interest on your savings account. By early repayment the amount of your loan decreases and you pay less interest. You may also be able to better use additional financial resources to purchase products or assets so that you can serve more customers. Consult with your bookkeeper or financial advisor what best suits your business.
Lower monthly payments with extra repayments
If you pay off your business loan early, you are usually cheaper each month. The balance of your outstanding loan decreases, so you pay less interest. Bear in mind that with most financiers you have to pay off before a certain date, if you want the extra repayment to have an effect on your monthly amount.
If you make an extra repayment on your loan before the 10th of the month, the amount to be paid for that month decreases. If you pay off extra after the 10th of the month, then your repayment has no effect on the depreciation of your standard monthly installment including interest for this month. We then settle it with your monthly installment for the following month.
Is my loan tax deductible?
With your own company you pay tax on your profit. The more deductible items you can deduct from your profit, the lower the amount you owe to the tax authorities. Which costs for a business loan can you deduct from the tax? To start with, you can deduct the closing costs, just like the interest you pay on your loan. You can deduct the total amount that you pay in interest in a year, for example USD 6,000 on a loan of USD 150,000, from your profit. Interest payments are considered by the tax authorities as business costs: you pay for the borrowed money. Repayments, on the other hand, fall into the expenditure category and this is not deductible from your total profit.