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.
Most commonly with business loans, the business or borrower pays the interest on the loan when the loan comes due plus some fixed amount of the principal. This debt is said to be amortized when it is paid off in equal installments over its term or life. The principal paid is the same every time period. It is only the interest that changes. As the loan is paid, the interest payments become smaller and more of the principal is reduced and finally paid off.
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
Amortization Schedule of a Business Bank Loan
|YEAR||BEGINNING BALANCE||TOTAL PAYMENT||INTEREST PAID||PRINCIPAL PAID||ENDING BALANCE|