How to Calculate ROI on a Business Loan

by | Sep 4, 2019 | Accounting, Finance

The return on investment from a loan will determine how beneficial the loan is for your business. Calculating ROI from a business loan will take into account how much you’ll invest and the profits you’ll get from that investment. You’ll get to know the impact that a loan will have on your business using this simple projection. 

Consider a loan as a form of investment. This investment has a certain level of risk that you need to consider before making it work for your business. It will be up to your appetite for risk whether you should take on a loan. A business loan can positively affect the growth of your business if you’re able to manage the loan repayments while boosting the profits of your business.

Why You Should Consider the ROI of a Business Loan

It’s best to have a good amount of working capital to mitigate the risks that come with investing in your business. If cash flow is tight at the moment, you can take advantage of business loans to boost your working capital. 

You’ll have to make accurate projections on the potential profit you’ll get from a loan if you’re going to calculate for the ROI. It will also give you the proper mindset of making the most out of the loan and achieving your target profits every month. The most important thing here is to maximise profit potential from minimum investment. By calculating the ROI, you’ll be able to know if the risk is worth taking or not. 

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How to Calculate Your ROI from a Business Loan

Calculating the ROI is quite simple, but estimating the net profit you’ll get from a loan can be quite tricky. You can get the ROI percentage from calculating Net Profit (the profits you’ll earn from using the loan) divided by the investment (the amount that you loaned) multiplied by 100. You can determine the Net Profit by subtracting the investment amount from total sales. 

(Net Profit / Investment) x 100 = ROI (%) 

A simple example from this is buying stocks you can resell online. If you loaned $20,000 to buy stocks and foresee that you can profit $10,000 from them, your ROI would be (10,000 / 20,000) x 100 = 50%. 

To get a more accurate result in calculating your ROI, you have to consider additional variables. You’ll have to budget the cost of the investment such as the interest rates, monthly repayments, and fees charged by the lender. 

From our previous example, let’s say the loan has an interest rate of 1.5% that has to be paid within 12 months. The cost, including interest and fees, would total to $3,900. Your overall investment would be 20,000 + 3,900 = $23,900. Your projected profit of $10,000 from the $20,000 loan, minus fees of $3,900, would net $6,100. To make a more accurate calculation of the ROI:

(Net Profit / Investment) x 100 = ROI (%) 

(6,100 / 23,900) x 100 = 25.52%

You still get a substantial profit from the loan, with an ROI of 25.52%

How a Business Loan Can Help You in the Long Run

A business loan can help you with any purpose, including paying for overheads, inventory, staff, and vendors. It can also give you a hand in consolidating business debt. A loan can fund your goals in improving your business front (renovations, fit-outs, equipment) to boosting your cash flow (stocks, marketing, advertising, delivery)

When it comes to ROI, a business loan can be your working capital to fund an initial investment. You can also use it to boost cash flow at the moment. You may also decide to get a business loan now while waiting for the profits of your initial investment to come through. 

Bizzloans has a Business Loan Calculator which you can use to determine how much a loan will cost you over its term. From there you can calculate how much ROI you’ll get with your projected profits from that loan. If you want to compare loan options, get a free quote below to get a good overview of the smart financing solutions available for your business.

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No Security Necessary

The main thing that makes unsecured loans more attractive than secured loans is the fact that they’re no security. It might be an obvious thing to highlight but it clearly matters. You won’t be weighed down by the pressure and worry associated with having collateral hanging over you and potentially being lost to the lender if you fail to make repayments. If you don’t want to take the risk of losing your collateral, you just need to opt for an unsecured loan instead. It’ll allow you to avoid any risks associated with secured loans.

Build Up Your Future Credit Score

By taking out a loan and then paying it off on time, you will help to build or repair your credit score. Many companies are dealing with poor credit, but by taking out an unsecured loan with a lender that is happy to lend to companies with poor credit, you can start to turn the situation around. Meeting regular repayment deadlines shows the world that you are able to stay on top of your financial obligations and pay off the money you owe, and that will only help your business going forward.

Why Your Business Might Want to Take Out an Unsecured Loan

There are lots of reasons why your business might take out a loan, as well as reasons not to. You shouldn’t take out a loan to cover running costs, but if you want to do other things, such as the things we’re going to discuss below, an unsecured business loan can be ideal.

Grow and Expand

Most entrepreneurs have big plans for their businesses. They want to ensure that their business is one that’s got a bright future. So if the time has come for you to grow and expand your business, you should think about whether taking out an unsecured business loan might help you to do that. It could be exactly what you need to get your business moving in the right kind of direction. It takes money and investment to grow your business and a loan might just be the ideal solution.

Take on More Clients and Customers

If your business doesn’t currently have the resources to deal with more customers and clients, it could be time to scale things up. However, that’s something that costs money, whether you like or not. Taking out an unsecured business loan could help improve the resources your business has available. It could mean hiring more people so that you have the human resources needed to take on more clients and make more customers happy. The loan will cover the costs associated with doing that and it’ll pay for itself if you’re able to improve your profits as a result.

Fund a New Marketing Campaign

Maybe it’s the case that attracting new customers to your business is where your problems lie. It’s not always easy to get your voice heard and make people aware of why they should be taking notice of your business. An unsecured loan could be used to fund a new marketing campaign that gets your message out there and makes more people interested in your business and what it’s offering. So if you have an idea for a marketing campaign that you think might work but you don’t have the financing for it, consider a loan.

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Improve with Fewer Risks

The chance to improve your business in the many ways mentioned above offers you a real opportunity that you might want to grasp. Secured loans can offer the same access to financing but come with more risks to your business. With an unsecured loan, you can reap all the rewards that come with having the cash to invest in your business without having to worry about the risks adversely affecting the business in the future. The chance to improve with fewer risks attached to that chance should not be ignored or dismissed.

The Requirements for Getting an Unsecured Business Loan

There are some requirements you’ll need to be aware of before you take out an unsecured business loan. These aren’t too harsh or restrictive at all, but they are important.

24 Month Limit

When you take out an unsecured loan from Bizzloans, you have to pay the loan back within 24 months. That’s the maximum repayment term that’s on offer. Of course, that won’t be a problem for the vast majority of businesses out there. It’s important that you look at the finances closely and decide for sure that this is something your business is going to be able to do. You’ll have a chance to do this when you get a quote from us, so you’ll know exactly what you’re signing up to.

Business Bank Statements

To ensure your business is in a financial position to take on a loan of the size you’ve applied for, you’ll need to simply submit your business’s bank statements. This allows us to ensure that we lend responsibly and don’t burden you with a debt that is too much for you to take on. It’s in both your best interests and ours that you’re able to handle the loan that you take on.

Photo ID

To ensure everything is correct and proper, and you are who you say you are, you have to submit a photo ID. This is common practice and ensures that all financial transactions are above board and in order. It’s very easy to do and needn’t be a headache for you. Once we are satisfied with your application, you’ve provided the bank statements and we’ve checked your ID, it won’t be long before you have access to the loan you applied for.

Getting an unsecured business loan for your company could be just what it needs right now. It’s a much safer option than taking out a secured loan and you’ll be accepted much faster. Don’t hesitate to get in touch with us here at Bizzloans if you’re thinking of taking out an unsecured business loan.

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