Business loans and credit let a company use money now and pay it back over time. This can help a business grow faster by buying equipment, adding inventory, hiring workers, or smoothing out slow sales periods. Borrowing matters because it can turn a good opportunity into real expansion, but it also creates a legal obligation to repay.
Responsible borrowing means the expected benefits should be greater than the total cost and risk.
Key Facts
- Total repayment = principal + interest + fees
- Simple interest = P × r × t
- Monthly loan payment depends on the principal, interest rate, and loan term.
- Debt service coverage ratio = net operating income ÷ total debt payments
- Credit utilization = credit used ÷ credit limit
- A strong repayment history can improve a business credit score and make future borrowing easier.
Vocabulary
- Principal
- The principal is the original amount of money borrowed before interest and fees are added.
- Interest
- Interest is the cost a borrower pays to use a lender's money.
- Term
- The term is the length of time a borrower has to repay a loan.
- Collateral
- Collateral is an asset a lender can take if the borrower fails to repay the loan.
- Line of Credit
- A line of credit is flexible borrowing that lets a business draw money up to a set limit and repay it as needed.
Common Mistakes to Avoid
- Borrowing without a clear purpose is risky because the business may take on debt that does not increase revenue or efficiency.
- Looking only at the monthly payment is wrong because fees, interest rate, and loan term determine the true total cost.
- Using credit cards for long-term expansion can be expensive because credit cards often have higher interest rates than business loans.
- Missing or delaying payments damages credit because lenders report repayment history and may charge late fees or raise future borrowing costs.
Practice Questions
- 1 A bakery borrows $8,000 at 6% simple interest for 2 years. How much interest will it pay, and what is the total repayment?
- 2 A business has a 1,250. What is its credit utilization as a percent?
- 3 A shop owner can borrow 600, but the loan payment is $450 per month. Explain whether this borrowing could be responsible and what other risks should be considered.