What Is Loan Amortization?

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As a small business owner, you know securing financing can be critical to starting or growing your company. One term you’ll come across when applying for a loan is amortization. But what exactly does it mean and why does it matter? Let’s find out.

The Basics of Loan Amortization

Amortization refers to the process of paying off a loan over time through regular principal and interest payments. An SBA loan amortization schedule outlines the breakdown of each payment and how they’re applied toward the loan balance. With SBA loan amortization, payments are structured so that over the loan term a portion of each payment goes towards interest while the remainder reduces the principal balance. At the beginning of the loan, interest makes up a larger portion of the payment. But as the principal declines over time, more of the payment goes towards paying down the principal.

Why Amortization Matters

When considering financing options, the amortization schedule can impact your regular payment amount and total interest paid over the life of the loan. Lenders may offer loans with shorter or longer amortization periods, ranging from five to 25 years typically. The longer the amortization, the lower the payment but the higher the total interest. It’s important to weigh the pros and cons of different SBA loan amortization schedules. A longer amortization reduces the immediate cash flow burden but ends up costing more overall. Carefully projecting finances and choosing the right schedule is key.

Exploring Your Loan Options

According to Zippia, 32% of small businesses applying for loans now apply to non-bank lenders. With so many financing options available, take time to research and compare offers. Here are some questions to think about: how long is the amortization period? What are the payments? Does the schedule fit my projected cash flow and business plans? What is the interest rate and total interest paid over the loan term? Are there prepayment penalties if I pay it off early?

Don’t hesitate to ask lenders to explain the amortization breakdown, so you understand the short and long-term costs. An amortization schedule that aligns with your business goals and projected finances will set your company up for success. Finding the right business loan doesn’t have to be challenging or overwhelming. Reach out to MCDC, and our experts can help you find the ideal business loan for your needs.