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How Finance Companies Calculate Interest

Are you applying for business funding? What interest are you going to be charged? Do you know how finance companies calculate the interest?

Calculating the Interest Rate of a Loan

What is meant by an interest rate? Well, it makes up the difference between the total that the lender will charge from you and the original amount the lender provided for you. This is the amount that the lender gets as profit from lending funds out to you.

Interest can be simple and compound. To calculate the simple interest, you just need to follow these steps: principal loan amount x interest x time. As for the compound one, the steps are as follows: P (1 + r/n)^(nt), where:

  • “P” is the initial, principal amount
  • “r” is the rate of interest
  • “n” shows how many times the interest is calculated per time period
  • “t” is the number of time periods

Interest rates differ from loan to loan, so you can come across rates from 0% to over 200%. What’s more, be aware that when setting an interest rate, lenders may also take into account your creditworthiness and how strong the financials and credit history of your business are.

Searching for Business Funding

If you’re seeking to obtain a business loan, you should be well aware that there are multiple options to pick from. You can turn to a large national bank, small community bank, credit union, online bank, microlender, and not only. You can also find lenders making SBA loans, which are partially backed by the U.S. Small Business Administration.

When applying, be aware that lots of lending companies will take into consideration both your business credit history and your personal credit score. Thankfully, there are exceptional business funding providers that aren’t focused on your credit history: they evaluate the amount of cash flow in your business when deciding your eligibility.

So, work with a reputable merchant funding provider that is ready to work with both low and high risk businesses of any size, as well as guarantees the cheapest and safest financing you need.

Calculating Interest of Business Loans

There are many different types of business loans and lenders that you can choose for your own financial needs. Interest rates are calculated based on certain formulas. Make sure to apply for the lowest possible rates and fees in your field.

Author Bio: Michael Hollis is a Detroit native who has helped hundreds of business owners with their (business funding) solutions. He’s experimented with various occupations: computer programming, dog-training, accounting… But his favorite is the one he’s now doing — providing business funding for hard-working business owners across the country.

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