Amortization Schedule for a Business Loan

Business Owners Should Know how to Amortize a Loan

Updated on November 10, 2022

Fact checked by J.R. Duren

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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. The process of making these payments is called loan amortization, and understanding amortization is something every business owner should embrace.

Key Takeaways

An amortization schedule shows you how much interest and principal each year that you hold a loan.
An amortization schedule is different than a payment schedule, which only shows you when your payments are due.
Businesses can use amortization tables to get a sense of how much a loan or an investment will cost them over time.

What Is an Amortization Schedule?

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 borrower’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.

Note

A payment schedule is different from an amortization schedule. A payment schedule is a calendar that shows when your loan payments are due. It shows the dates of each of your payments and the payment amount, but it doesn’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 business 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: Each year of the loan repayment
Column 2: The beginning balance of the loan at the start of the year.
Column 3: Total payments for the year (interest plus principal)
Column 4: Amount of interest paid (loan balance times the interest rate of 9%)
Column 5: The amount of principal you'll pay for the year
Column 6: The principal you paid subtracted from the balance

Note

You can see how the initial balance is reduced every year by the 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.

Amortization Schedule of a Business Bank Loan

Year	Beginning Balance	Total Payment	Interest Paid	Principal Paid	Pending Balance
1	$20,000	$5,800	$1,800	$4,000	$16,000
2	$16,000	$5,400	$1,440	$4,000	$12,000
3	$12,000	$5,080	$1,080	$4,000	$8,000
4	$8,000	$4,720	$720	$4,000	$4,000
5	$4,000	$4,360	$360	$4,000	$0

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 your cash flow is favorable, you may have the option to pay a loan off early, or at least make partial prepayments and save some of that interest if the lender is willing to apply the payment to the 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.

Frequently Asked Questions (FAQs)

What is an amortization schedule for a business loan?

An amortization schedule for a business loan is a visual representation of the payments you'll make for the business loan, including the number of years you'll pay, how much your principal will go down each year, and how much you'll pay in interest.

How do you calculate a loan amortization schedule?

You can use a spreadsheet formula, an online calculator, or ask your lender to calculate the amortization schedule and provide you with the results.

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Sources

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Temple University. "How Is an Amortization Schedule Calculated?"