What is Business Loan
Amortization?
Business loan amortization is
an accounting term that refers to the month to month breakdown of a business
loan or related credit facility. Each month that you have an outstanding loan
you are required to pay interest and principal at a pre-determined rate. This is
very similar to a mortgage in the sense that you pay the interest on the loan
first prior to paying the principal. Below is a graph showcasing a sample
amortization of a loan during a twelve month period. Please note that this
example makes the assumption that the business loan carries a five year term
with a fixed interest rate of seven percent.
|
Payment Number
|
Payment Amount
|
Principal Payment
|
Interest Payment
|
Balance
|
|
1
|
$1,509.27
|
$925.93
|
$583.33
|
$99,074.07
|
|
2
|
$1,509.27
|
$931.34
|
$577.93
|
$98,142.73
|
|
3
|
$1,509.27
|
$936.77
|
$572.50
|
$97,205.96
|
|
4
|
$1,509.27
|
$942.23
|
$567.03
|
$96,263.73
|
|
5
|
$1,509.27
|
$947.73
|
$561.54
|
$95,316.00
|
|
6
|
$1,509.27
|
$953.26
|
$556.01
|
$94,362.74
|
|
7
|
$1,509.27
|
$958.82
|
$550.45
|
$93,403.92
|
|
8
|
$1,509.27
|
$964.41
|
$544.86
|
$92,439.51
|
|
9
|
$1,509.27
|
$970.04
|
$539.23
|
$91,469.47
|
|
10
|
$1,509.27
|
$975.70
|
$533.57
|
$90,493.78
|
|
11
|
$1,509.27
|
$981.39
|
$527.88
|
$89,512.39
|
|
12
|
$1,509.27
|
$987.11
|
$522.16
|
$88,525.28
|
As you can see, although the
payment remains the same for each month, the amount of interest decreases while
the amount of principal repayment increases each month. This is because the
interest associated with the business loan is tied to the loan balance. As you
repay each bit of principal, the total interest applied to the loan decreases.
This trend continues until the last payment on the business loan. You can
references the tools on the LookingForBusinessLoan.com website which can assist
you in developing a business loan amortization schedule.