Amortization Schedule for a Business Loan

Business Owners Should Know how to Amortize a Loan

When a business firm borrows money from a commercial bank, it typically takes out an installment loan. Installment loans can be paid back using a variety of payment plans, but in the case of a business loan, they are usually paid back either semi-annually or annually. Payments are equal payments over time. The process of making these payments is called loan amortization.

An amortization schedule is a complete table of periodic blended loan payments, showing the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term. While each periodic payment is the same, when you begin repayment, most of each periodic payment is interest. The percentage of each payment that goes toward interest diminishes over time and the percentage that goes toward principal increases. Later in the schedule, the majority of each periodic payment is principal. The last line of the amortization schedule shows the borrowerâ€™s total interest and principal payments for the entire loan term. This debt is said to be amortized when it is paid off in equal installments over its term or life.

A payment schedule, on the other hand, is very different. A payment schedule is a calendar, simply showing when loan payments are due. It shows the dates of each of your payments and the payment amount, but it doesnâ€™t break down how much of your payment goes towards interest or how much gets applied to your principal.

Calculating the Amortization Schedule

While there are many online tools for calculating an amortization schedule, you should know and be able to complete the calculations manually.

Below is an amortization schedule for a business loan of \$20,000 at a 9% stated, or nominal interest rate with a five-year term. The loan is scheduled to be paid off in equal annual payments over the five year time period. Here is the explanation for how to calculate the numbers in each column:

Column 1: This is simply the year that the loan is outstanding.

Column 2: This is the beginning balance of the loan of \$20,000. You can see how that balance is reduced every year by that amount of the principal paid on the loan. The principal is to be paid in equal annual installments which would make the principal payments \$4,000 per year for the five-year term of the loan.

Column 3: Total payment is calculated: Interest Paid + Principal Paid

Column 4: Interest Payments are calculated as follows: Beginning Balance X .09

Column 5: Principal payments are equal annual payments as specified by the lender

Column 6: Ending Balance for each time period = Beginning Balance - Principal Paid

Acting on the Amortization Schedule

The Amortization Schedule will tell you exactly how much interest you are going to pay over the term of the loan. However, if cash flow is favorable you may have the option to pay a loan off early with full prepayment, or at least make partial prepayments and save some of that interest if the lender is willing to apply the payment to principal. Read your loan documents carefully to understand this provision, and if there are any prepayment penalties or fees charged by the lender for the privilege of paying the loan down early.