##### Small Business Loans

## How do Loans Work?

Even if you don’t get a loan with us at CIC, it’s still important to understand how debt works. How do interest rates work? What is APR? What does “amortization” mean? If you’re planning to use debt as a form of financing—in your business or even in your personal life—we hope this page will help.

### Basic Loan Calculator

If you go no further down on this page, at least make use of our Loan Calculator. This particular calculator assumes you are accruing interest and making payments on a monthly basis. In addition, it gives you the monthly payment necessary to entirely pay off your debt by the end. Most loans work this way, but not all, so keep reading to learn more.

Enter Loan Data: | |
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Amount of the loan ($): | |

Annual interest (%): | |

Repayment period (years): | |

Additional Fees ($): |

Payment Information: | |
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Monthly payment: | $ |

Number of payments: | |

Total interest: | $ |

Total cost of loan: | $ |

### Advanced Loan Calculator

For more advanced calculations, we have put together an Excel file. With this calculator, you can see your entire payment schedule mapped out in a table.

Please click this link, and then **DOWNLOAD** the file. (The web version is read-only.)

### Term Loans

### How Interest Works

*annual*basis. However, if interest is accruing on a different basis, it’s important to convert the rate. If it’s accruing monthly, for example, you’d take the annual rate and divide by 12, since there are 12 months in a year. (Conversely, to convert an interest rate from monthly to annual, you’d multiply by 12.)

*Danny takes out a loan of $10,000. The annual interest rate is 12%, but interest accrues monthly. How much interest will accrue each month? To figure this out, take the following steps:*

*Convert annual interest rate to monthly rate: 12% ÷ 12 = 1%**Multiply loan balance by monthly accrual rate: $10,000 x 1% =***$100**of interest each month.

### What is Amortization?

*amortizing*your debt, or slowly killing it off. Indeed, the word “amortization” comes from the Latin

*admortire*, or “to kill.”

*Unamortized Loan*

*Fully Amortized Loan*

*Partially Amortized Loan*

### Common Loan Examples

*annual*interest rate, the lender informs Brian that the interest will accrue (build up)

*monthly*. Therefore, we will use his monthly interest rate, which is 9% ÷ 12 =

**0.75%**.

**$60**in interest.

*principal*

*—*the amount he still owes from what he initially borrowed.

**$7,360**. Thus, his interest charge will be $7,360 x 0.75% =

**$55.20**.

*annual*, but the interest accrues on a monthly basis. Therefore, we will use her monthly interest rate, which is 6% ÷ 12 = 0.5%.

**$250**in interest.

**$9,000**. At the end of 3 years, Caroline will still have to pay back the loan itself ($50,000), and will owe what’s called a

*balloon payment*. In total then, Caroline will have paid $59,000.

**$150**. At the end of her loan, she will have paid 18 payments @ $250 + 18 payments @ $150 = $4,500 + $2,700 =

**$7,200**. In addition to the principal payment of $20,000, she’ll make a balloon payment of $30,000 at the end. In total, she will have paid $57,200.

*term*on the loan itself is still 5 years. This means that at the 5-year mark, the entirety of the remaining loan is due. He will have to make a large balloon payment.

### What Affects My Ability To Get A Loan?

Before spending time applying for a loan, it’s helpful to know what factors affect your likelihood of approval. Below is a list of pros and cons.

Some lenders have looser requirements but if you are deemed a risky borrower, they will likely charge you more interest.

- Your business is profitable, currently and historically.
- If you are breaking even, you can show how the use of a loan will immediately make you profitable.
- You have assets, which can be used as collateral.
- You (or the owners) have good personal credit.
- You have outside income.
- You can share business financials (e.g. a Profit & Loss Statement and Balance Sheet).

- The reverse of everything in the “Pros” list.
- You are an early stage business/startup and don’t expect to be profitable any time soon.
- You have no personal investment in your business.
- Your business doesn’t pay taxes or shows a loss on its taxes.

### Be a Savvy Borrower

There are many steps where you can get tripped up during the loan process. Whether you get a loan from us at CIC or with someone else, we want you to be educated. Check out our tips below to be a savvy borrower.

- Verify whether your interest rate is annual or monthly.
- Ask for any other fees (in addition to interest).
- Ask for the “total finance charges.” This the total cost of the loan, which includes both interest AND any fees charged by the lender, third parties, etc.
- Ask whether there’s a “balloon payment.”
- Use our advanced loan calculator or search for an “amortization calculator” online to understand your cost, APR, etc.
- Ask whether they will require collateral.
- Ask whether you need to sign a personal guarantee.
- Ask what happens if you miss a payment.
- Ask if there are pre-payment penalties and if so, how they work.
- Ask your lender to show you the loan documents ahead of time. Read them, ask questions, and/or review them with your lender.
- Verify that anything promised to you is contained in your loan docs. Remember, the loan docs trump any verbal agreement you may have made.