October 12, 2021
What Is a Business Loan Amortization Schedule?
A small business loan amortization schedule lays out the payment schedule for the life of your loan. However, it goes beyond a simple payment schedule by showing the portion of each payment that goes towards interest payments and principal.
This also makes the amortization schedule important for determining how affordable your loan will be. Using your amortization schedule, you can accurately determine how much cash flow you’ll need to make your payments.
To explain why loan amortization schedules are so important, we'll review everything you need to know about them in this post.
As you can see, the amortization schedule shows you:
Business Loan Amortization Definition
Forbes defines loan amortization as “The process of scheduling out a fixed-rate loan into equal payments. A portion of each installment covers interest and the remaining portion goes toward the loan principal.” While Forbes is referring to loan amortizations in general, the process is no different with a business loan. Any installment loan with a fixed rate (home mortgage or a business loan, etc.), goes through the amortization process.How Business Loan Amortization Works
To explain how amortization works, take a look at this sample amortization schedule from SmartAsset:| Month | Remaining Balance | Interest Rate | Payment Amount | Interest | Principal |
| 1 | $2,500 | .05% | $300 | $125 | $175 |
| 2 | $2,350 | .05% | $300 | $116.25 | $183.75 |
| 3 | $2,141.25 | .05% | $300 | $107.06 | $192.94 |
| 4 | $1,948.31 | .05% | $300 | $97.42 | $202.58 |
| 5 | $1745.73 | .05% | $300 | $87.29 | $212.71 |
| 6 | $1533.01 | .05% | $300 | $76.65 | $223.35 |
| 7 | $1309.67 | .05% | $300 | $65.68 | $234.52 |
| 8 | $1075.15 | .05% | $300 | $53.76 | $246.24 |
| 9 | $828.91 | .05% | $300 | $41.45 | $258.55 |
| 10 | $570.35 | .05% | $300 | $28.52 | $271.48 |
| 11 | $298.87 | .05% | $300 | $14.94 | $285.06 |
| 12 | $13.81 | .05% | $14.50 | $.69 | $13.81 |
| Total | - | - | $3315.50 | $814.71 | $2499.99 |
- How your total payment changes over time.
- The proportion of your payment that goes toward interest and principal.
- The remaining balance on your loan in any given period.
How to Calculate Business Loan Amortization
The amortization schedule above is for a one-year, $2500 loan with a 5 percent interest rate. Moving from left to right, you calculate interest paid by multiplying the beginning balance ($2.500) by the interest rate (5 percent). In this case, the lender determines the amount of principal payments so that’s a given. To determine total payment, you add principal and interest. Then, you subtract the total payment amount from the beginning balance to calculate the remaining balance. That remaining balance becomes your starting balance for the next period, and you do the calculations all over again. While it’s good to understand the calculations behind your amortization schedule, you can also use an amortization calculator. These business loan calculators can determine your amortization schedule, in addition to showing:- Your monthly payments
- Total amount paid
- Total interest paid
The Benefits of Amortizing Loans vs. Non-Amortizing Loans
As Investopedia explains, non-amortizing loans don’t have an amortization schedule because borrowers pay them off in a lump sum. Common non-amortizing loans include interest-only loans and balloon mortgages. When compared to non-amortizing loans, amortizing loans have the following benefits:- Lower interest rates since they’re often secured and offer consistent cash flow to the lender.
- Greater number of lender and loan options due to relative popularity of amortizing loans.
- More affordable payments since they’re spread out over the life of the loan amount.