Small business owners can turn to a business line of credit when they require short-term funds.
But is this the best option for your company?
Will you be able to handle the repayments?
In this post, we’ll introduce you to a business line of credit calculator. This will allow you to compute how much you’d have to pay each month.
We’ll also analyze if a line of credit is the best alternative for small business owners.
Business line of credit 101
One of the advantages of this source of finance is that it makes funds available only when you need them.
👉🏻 With a line of credit, you pay interest for the sums you use and not for the credit limit you are granted.
👉🏻 When you draw funds, interest starts accumulating.
👉🏻 As you make repayments, your credit limit is restored.
In this respect, a line of credit works like a credit card.
Business Line of Credit Calculator
Why is a business line of credit calculator necessary?
You may be asking yourself this question. When a bank or financial institution offers this form of credit, won’t they tell you the interest rate?
Of course, they will.
But a business line of credit calculator serves a different purpose.
It can help you work out the sum you’ll have to repay each month.
Why is this important?
Remember that the lender will continue to charge interest on the outstanding amount. Every month when you pay, your principal will get reduced. But not by the sum you have paid. That’s because some portion of your payment will be allocated towards interest on the outstanding loan.
The total amount payable to complete the borrowed amount will depend upon:
- The rate of interest on the line of credit
- The outstanding balance on your line of credit
- The number of months left to complete the repayment
As you can see, the calculation can get complicated. Fortunately, there’s a simple solution. You can use a business line of credit calculator.
Business Line of Credit Calculator: Formula
Here’s the formula for the business line of credit calculator:
What do the letters in the business line of credit calculator formula stand for?
- P is the monthly payment that you’ll need to make to complete the repayment. This is the amount that the formula will help you determine
- r stands for the monthly rate of interest in decimal form
- PV is the total amount you need to repay of the loan TODAY
- n is the number of months in which you want to complete the payment
If you look at the business line of credit calculator formula carefully, you’ll see that there’s a minus sign before the letter n. If you miss this, your calculation will be incorrect.
You should know that you’ll have to make this calculation every month. Why? Because the PV (the total amount you need to repay of the loan) changes every month because you make payments.
Business Line of Credit Calculator: an Example
Now, let’s carry out the calculation and see the result the business line of credit calculator provides.
Let’s imagine you borrowed $20,000 on your line of credit; you need to repay this amount in 18 months. You know that your monthly rate is 1.5%. Because you need the decimal form, you’ll divide it by 100. So, your monthly interest rate is 0.015 in its decimal form (1.5% / 100 = 0.015).
If you only have your yearly interest rate, you can learn what your monthly rate is by dividing it by 12. For example, let’s assume that the yearly rate of interest is 18%. Then, 18% divided by 12 = 1.5%. So, the monthly rate will be 1.5%.
Will all this information, you can use the formula.
- r = 0.015
- PV = $20,000
- n = 18
Here’s the formula for the business line of credit calculator again.
The next step is to add your numbers:
Here are the subsequent steps in the calculation:
In the next step, you need to solve the exponent (1.015 to the power of -18). How will you do that?
What’s an exponent?
It’s a mathematical shorthand that tells you how many times to multiply a number by itself. So, 25 can also be written as 2x2x2x2x2. That’s 2 multiplied by itself 5 times. In our example, 1.015 is multiplied by itself 18 times.
You’ll need to use your calculator. Enter the number 1.015 and then press the exponent button. Here’s what the exponent button looks like . It could also look like this . Now, enter the number -18. In some calculators, you would need to press the button and not the button.
This sounds complicated, but you can uncomplicate it!
You don’t really need a calculator for solving the exponent. You can go to your Google search bar and write “1.015 to the power of -18”. Google will give you the result hassle-free.
This means that you need to pay $1,276 for that first month of the 18-month period to repay the $20,000 you owe on your line of credit.
If you do the calculations the next month (now you only owe $18,724, and there are 17 months to pay), you’ll find that the new payment would be $1,255.52.
The third payment would be of $1,235.99, and so on and so forth.
Is a Line of Credit your Best Choice?
Now let’s address another question.
Should you use a line of credit at all?
Indeed, this source of finance can sometimes be a convenient way to meet your short-term liquidity requirements. However, it has several disadvantages, as well.
Disadvantages of a line of credit
- In addition to the interest rate that you need to pay, you may also be charged for setting up the line of credit.
- There could be an annual fee, as well. The lender may require you to pay this even if you don’t use the line of credit.
- It may be necessary to provide collateral.
- A borrower with a poor credit score or one who does not have a credit history may be ineligible to apply.
- Interest calculations on a line of credit can be complicated. You may get an unpleasant surprise when you total your interest costs.
A Small Business Loan Could Be a Better Alternative
A small business loan could be a far superior option. Camino Financial’s small business loans can offer tremendous advantages to entrepreneurs. Our motto is “No business left behind,” and we do everything to live up to it.
For example, you don’t require a minimum credit score to apply for a Camino Financial loan. Business owners without a credit history are also eligible to apply.
There’s more good news for small business owners: Camino Financial never requires you to put up collateral to secure your loan. So, your personal and business assets are safe.
Our minimum requirements are simple and easy to comply with. All we need is that your business should have been in operation for at least 9 months and have a minimum of $30,000 in annual gross sales.
Additionally, loan applicants must have a social security number OR a tax identification number (ITIN).
Grow your Small Business with the Capital you Need!
Camino Financial’s small business loans can provide a cost-effective solution for your company’s fund requirements. Our interest rates reflect our motto, “No business left behind.” You can be sure that we’ll do our best to provide you with the money you need for your business.
Not sure how to calculate the cost of a business loan?
We invite you to use our business loan calculator to determine your monthly payment and other loan terms.