A loan can be a valuable investment for your business. By using financing responsibly, you can help your company maintain its competitiveness and grow.
But how do you determine what kind of return you could see on your investment (ROI)? We’re letting you in on what you need to know.
Even if math isn’t your strong suit, find out how to calculate business loan ROI in a few simple steps.
How to Calculate ROI in Business When Taking Out a Loan
When you’re looking to calculate the ROI from a business loan, you’ll need to know the financing costs, such as interest rate and lender fees. You’ll also need to know the profits you’ll get from the investment, in this case, the loan. Understanding your expected ROI can help you decide if it makes sense to get financing.
Here’s the formula for calculating ROI:
(Net Profit / Investment) x 100 = ROI
Net profit refers to the profits you expect to get from your loan proceeds minus financing fees.
Investment refers to the loan amount, including interest and fees.
Average Amount of Business Financing
In 2020, the average amount of business financing extended to a Fast Capital 360 customer was $31,000.
Examples of Calculating Business Loan ROI
In simple terms, business loan ROI could be calculated as follows:
Let’s say you want to take out a business loan for $50,000 and anticipate a net profit of $20,000.
A high-level ROI calculation would look like this: ($20,000 / $50,000) x 100 = 40%
In this case, you’d project a 40% ROI.
This calculation, however, is general and doesn’t take into account loan fees and expenses.
To do that, you can estimate financing expenses by using a business loan calculator or speak to your loan advisor for a breakdown of costs.
Let’s say you take out that $50,000 as a business term loan over 2 years with an estimated interest rate of 7%. Using a business loan calculator, you would see that you’d pay about $3,730 (rounded) in interest over the course of the loan, with payments of approximately $2,239 per month. (Note: If the business term loan calculator you use doesn’t estimate the total cost of financing, you could approximate by multiplying your estimated payment amount for the number of repayments in your term.)
This would mean your $50,000 loan (or “investment”) would actually cost roughly $53,730 (rounded).
Conversely, your net profit would be approximately $16,270, or $20,000 minus the $3,730 your loan cost you.
To calculate the ROI with this more detailed information, we’d see:
($16,270 / $53,730) x 100 = 30% ROI (rounded)
Fast Capital 360 Business Advisor Ryan Stoops offers another way to think about the ROI of a business loan, suggesting loan applicants consider the profit they’ll generate from whatever the funds are accomplishing, minus the interest of the loan.
What Is a Good ROI for a Business?
A good ROI varies depending on the company, industry and investment. The higher the ROI, the better, though. Many companies aim for double-digit growth, sometimes between 15%-30% or higher. In other cases, a 5%-10% ROI could be considered good.
When determining whether a projected ROI is good for your business, consider how long it will take for you to start turning a profit from the loan proceeds. Additionally, weigh how the investment will affect your long-term growth. Consider how repayment of the loan will impact your cash flow too.
In terms of a good ROI for a business loan, think about it this way: Let’s say you take out a 9-month loan for $10,000 to buy inventory, and it will cost you $3,500 in interest for that loan. If you’re able to sell that inventory for $15,000 in 1 month, you’ve already made a profit.
Use the profit to reinvest in new inventory you can turn over. There’s no added interest, and you can do this multiple times throughout the term of your loan. If you’re able to sell inventory each month, you could make a profit 9 times.
Also, though specific terms can vary, consider that many lenders offer an early payoff discount of some sort if you’re able to repay your loan and interest in full within a predesignated window of time. This can lead to an even greater ROI.
In the end, regardless of your industry, the question to ask yourself is this: Will your business move forward if you’re able to make a profit from the loan?
If the answer is yes, then it’s arguably a good ROI for your business.
Using a Business Loan to Your Advantage
Obtaining business financing can be a wise investment if the return is favorable.
A business loan can help you with any of the following and more:
- Seasonal lulls
- Working capital
- Technology upgrades
- Equipment purchases
- Emergency expenses
- Inventory purchases
If you need business financing fast, apply online with our simple application. Get multiple offers from our nationwide network of lending partners. Even better, you could be funded within 24 hours of approval.