Key thing to remember when setting up LOANS to Finance your small business.
Hey y'all! With inflation running rampid, and many business lenders, including Amazon itself, discontinuing small business loans, I imagine many of you are struggling as I have with low cost financing. Here is a key calculation to remember before you sign your next business loan:
Up front fixed fees are NOT the same as your interest rate. Simple example: you get a $50,000 small business loan for 9.99% fixed rate, with no fees, over 1 year. Your interest over the life of that loan will truly be 9.99%. If you pay it off equally, your total interest paid will amount to $2,500. This is because the interest rate only applies to your actual balance, and your average balance if paid in equal installments over 12 months, is half your total balance, in this case about $25,000. A simple interest APR loan is completely different from a fixed up front fee loan. If for example you borrow the same $50,000 and it has a 9.99% up front fixed fee, for one year, your fee will be $5,000. That's an APR of 20% , double the interest amount of the 9.99% simple interest loan. Because the entire fee is charged on the beginning balance, not the average monthly balance. So if you pay $5,000 up front flat fee on a $50,000 loan for one year, since your average loan balance will still be about $25,000 over the life of loan, a $5000 fee is really paying 20% interest.
And since 20% is pretty much many of our profit margins , that makes that loan unprofitable and unsustainable to many businesses, such as mine. Most people don't know the difference between an upfront fixed fee loan and a simple interest rate loan with no fee. The difference is night and day. An upfront fee is equivalent to double the interest rate. 10% upfront fee = 20% interest rate for 1 year loan, as shown above if paid in equal installments over life of loan.
Always go for simple interest loans, with no fees, not upfront fixed fee loans. Unless The Upfront fixed fee is 5% or less, which is equivalent to a 10% interest loan... Or if the upfront fee covers a longer term than just 1 year. Then it's not as high an APR.
The quick rule of thumb to figure your average balance over the life of a life alone is to cut the loan beginning balance in half. Then divide The Upfront fee amount by your loan average balance, and divide that by the number of years on the loan, to get your average APR on a upfront fixed fee loan.
Example: For A loan with an upfront fee of 10% for $30,000 borrowed for 2 years, Your Average loan balance over the two years is $15,000. The 10% upfront fee is $3,000. $3000 fee/$15000 avg balance/2 years = .10, or 10% interest rate. That's not a bad deal. But if that fee was for a one-year loan, the interest rate would effectively be 20%. Not so good. Hope this helps somebody out there. ;)👍
Key thing to remember when setting up LOANS to Finance your small business.
Hey y'all! With inflation running rampid, and many business lenders, including Amazon itself, discontinuing small business loans, I imagine many of you are struggling as I have with low cost financing. Here is a key calculation to remember before you sign your next business loan:
Up front fixed fees are NOT the same as your interest rate. Simple example: you get a $50,000 small business loan for 9.99% fixed rate, with no fees, over 1 year. Your interest over the life of that loan will truly be 9.99%. If you pay it off equally, your total interest paid will amount to $2,500. This is because the interest rate only applies to your actual balance, and your average balance if paid in equal installments over 12 months, is half your total balance, in this case about $25,000. A simple interest APR loan is completely different from a fixed up front fee loan. If for example you borrow the same $50,000 and it has a 9.99% up front fixed fee, for one year, your fee will be $5,000. That's an APR of 20% , double the interest amount of the 9.99% simple interest loan. Because the entire fee is charged on the beginning balance, not the average monthly balance. So if you pay $5,000 up front flat fee on a $50,000 loan for one year, since your average loan balance will still be about $25,000 over the life of loan, a $5000 fee is really paying 20% interest.
And since 20% is pretty much many of our profit margins , that makes that loan unprofitable and unsustainable to many businesses, such as mine. Most people don't know the difference between an upfront fixed fee loan and a simple interest rate loan with no fee. The difference is night and day. An upfront fee is equivalent to double the interest rate. 10% upfront fee = 20% interest rate for 1 year loan, as shown above if paid in equal installments over life of loan.
Always go for simple interest loans, with no fees, not upfront fixed fee loans. Unless The Upfront fixed fee is 5% or less, which is equivalent to a 10% interest loan... Or if the upfront fee covers a longer term than just 1 year. Then it's not as high an APR.
The quick rule of thumb to figure your average balance over the life of a life alone is to cut the loan beginning balance in half. Then divide The Upfront fee amount by your loan average balance, and divide that by the number of years on the loan, to get your average APR on a upfront fixed fee loan.
Example: For A loan with an upfront fee of 10% for $30,000 borrowed for 2 years, Your Average loan balance over the two years is $15,000. The 10% upfront fee is $3,000. $3000 fee/$15000 avg balance/2 years = .10, or 10% interest rate. That's not a bad deal. But if that fee was for a one-year loan, the interest rate would effectively be 20%. Not so good. Hope this helps somebody out there. ;)👍
