How to Compute Monthly Business Loan Payments

The monthly payment on a business loan--or any other type of loan--is computed using the time value of money concept, in which the loan principal is the present value of a series of future cash flows. If the loan principal is P, the interest rate R (percent), and the loan term T (months), then the monthly payment M (series of future cash flows) is given by the formula

              PR(1 + R/1200)T
    M =  ------------------------
         1200(1 + R/1200)T - 1200

Once you know the monthly payment, you can also compute the total interest paid over the course of the loan. The formula is

    Total Interest = MT - P

You can also use the handy calculator on the left to quickly compute your monthly business loan payments and interest.

Example: Jeanne takes out a loan for $50,000 to start a house painting business. If the loan term is 10 years and the interest rate is 6%, what is her monthly payment?

First compute the numerator. Since 10 years equals 120 months,

PR(1 + R/1200)^T = (50000)(6)(1.005)¹²⁰ = 545819.02

Next compute the denominator.

1200(1 + R/1200)^T - 1200 = 983.276

And so the final answer is 545819.02/983.276 = $555.10.

The total interest she pays is

(120)(555.10) - 50000 = $16612.

© Had2Know 2010