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.

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
As you can see, the amortization schedule shows you:
  • 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.
You’ll likely see amortization schedules that look much different than the one above, but this is the general format. Other schedules may be broken out by month. Also, in many cases, the payment amount will stay the same while the portion of the payment that goes to the loan principal will increase.

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.
Also, if you choose to, you can pay some amortizing loans off early, which can save you on interest costs. New call-to-action

Conclusion: Put Your Loan Amortization Schedule to Use

Amortization schedules are invaluable tools for loan analysis both before and after you take out a business loan. As mentioned, you can use them alongside your cash flow projections to determine how affordable your loan will be. You can also create amortization schedules for different scenarios. For instance, if you want to know how your loan cost will change if you pay it off early, pull up your amortization schedule and add up the cumulative interest and principal costs for the period in which you plan to pay off the loan. Then, compare that number to the total interest and principal costs you’d pay if you didn’t pay off the loan early. Similarly, you could use your loan amortization schedule to see how larger payments might affect your loan cost. In effect, business loan amortization schedules enable you to analyze loan costs in just about any way you like. However, we suggest also considering other loan costs, such as fees and penalties, that may not be included in your amortization schedule.