Understanding Business Loan EMI: How It Works and Why It Matters

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business loan EMI
business loan EMI

Business loans are crucial to the growth and success of businesses as they can provide the necessary capital to seize growth opportunities and increase their competitiveness or to meet their day-to-day operational expenses. Generally, these are flexible loans that can be repaid during the selected loan tenure. However, while borrowing funds, it is crucial to understand nuances related to debts, like business loan EMI (Equated Monthly Instalment).

How Loan EMI Works 

Understanding how an EMI helps borrowers determine the affordability of a business loan. Lenders divide the loan amount and interest accrued into equal, fixed sums that the borrower must pay every month until the loan is repaid fully. Basically, it is the amount that costs you monthly.

        The components of EMI are the principal and interest. The total amount one borrows from the lender is called the principal. The interest is charged on this principal amount for the entire loan duration.

        Though it is a fixed amount, there is an unequal combination of principal and interest in an EMI (Equated Monthly Instalment) due to the amortisation process – gradual loan amount reduction through regular payments. 

        At the start of loan tenure, a significant portion of EMI is allocated to interest payment, while a smaller portion goes towards the principal repayment. As the borrower makes regular EMI payments, the outstanding business loan balance reduces. Interest is calculated based on this reducing loan balance, leading to decreased interest. 

Relevance of EMI for Borrowers 

Here are key points highlighting the relevance of loan EMI:

  1. Loan Repayment Planning: Knowing business loan EMIs is crucial for entrepreneurs to manage their loan repayment effectively. They can plan their finances, and ensure timely repayment to maintain sound creditworthiness. For loan repayment management, borrowers can consider prepayment and foreclosure. Loan prepayment helps to reduce the interest component in EMIs.
  1. Affordability Assessment: Entrepreneurs can assess loan affordability by knowing their business loan EMI amount. Considering their income and other financial commitments, they can determine the loan amount that they can pay comfortably.
  1. Comparison of Loan Offers: EMI amount helps borrowers to evaluate the cost of borrowing and choose a suitable loan offer with favourable terms from different lenders.

Key Factors Affecting the Business Loan EMI 

Here is how EMI components and other factors affect the EMI amount:

        Impact of Interest Rate

Interest rate is the primary factor that plays a significant role in determining the EMI amount. Lower interest rates result in lower amounts of EMIs and vice versa. Compare business loan interest rates with different lenders to find your business’s most favourable financing option.

        Impact of Principal

The principal loan amount is a crucial factor when determining the cost of your loan, as interest is calculated on the principal.  A high loan amount attracts a high EMI amount. Reduce the loan amount to reduce monthly payments. You can get an unsecured business loan of up to Rs.50 lakh with reputed lenders. For a higher loan amount, they can offer a secured loan. Borrowers can collateralise a property.

        Impact of Loan Tenure

Business loans can be availed for a long term – up to 48 months. A longer tenure can reduce the loan EMIs. In contrast, a shorter loan tenure results in a high EMI. Borrowers should apply for a convenient tenure. Business loan repayment tenure can be up to 48 months.

Calculation of EMI 

By calculating the EMI and comparing it with your business’s income and expenses, you can assess whether you can comfortably manage the loan repayment without straining your finances. 

The formula to calculate business loan EMI is as follows:

EMI for a Loan = P x r x (1+r) ^n/((1+r) ^n-1).

Where,

P – Principal amount

R – Rate of interest.

N – Tenure 

Lenders offer ready-to-use digital tools to make calculations easy for free. You can utilise a business loan EMI calculator at the official website of the lending institution and know EMI even before making an application. If individuals already know the loan EMI, they can understand if they can pay the EMI amount comfortably. If yes, they can proceed with the same loan size. Otherwise, adjust the figures to reach the desired EMI. Another convenient tool is a business loan eligibility calculator to determine business loan eligibility.

Conclusion

Availing a business loan involves a series of decisions – from choosing the right lending institution to repayment tenure that aligns with financial requirements and budget. Besides choosing the best business loan, planning finances for convenient repayment is also crucial. Borrowers can plan their finances effectively by comprehending how business loan EMI works. Tools like business loan eligibility calculators and EMI calculators can help in making informed decisions.