How to Calculate EMI on Business Loan? 3 Simple Steps

The much talked about demonetization has brought about certain positive changes in the Indian business environment such as less corruption, more accountable cash instruments and legitimate bank accounts for individuals and businesses. While demonetization has affected cash-based businesses in the short term (and obliterated some of them completely), it has given way to more online transactions and accountability in general. Add the element of GST to this and businesses are struggling with invoicing and working capital issues. While the blow of both these changes has affected the Indian business scenario, it is important to understand how long markets will take to recover from the disruption caused and when will teething issues of GST implementation be done and dusted. But what is most important here is to address the following: After all, how long will it take to boost investment and businesses? And how long will it take to create more jobs in the Indian economy?

While, these might not have a huge impact on larger, more renowned business firms, surely those running small businesses especially the Small Medium Enterprises (SMEs) have faced tremendous sustainability-related trials and tribulations. SMEs play a significant role in most economies, particularly in developing countries like India. Research shows formal SMEs contribute around 60% of total employment and 40% of GDP in the growing economy leading to the conclusion that most of the income generated by the government is from SMEs. But most of the SMEs don’t function or face problems due to the lack of finance. The major issue they face is when it comes to the approval of a secured small business loans because there are many banks and NBFCs who are reluctant to provide loans to small business firms. Most of them only approve loans for huge business entities. This leads us to believe that domestic private investment in SMEs remains in a little bit of a funk. To ease the flow of business, there is a need to ease credit flows in the economy.

That said, if you are one of those SMEs who has faced rejections from various financial institutions, there is no need to get disappointed. There are many new and small financial institutions who can help you with acquiring finance. Once you are ready for your SME loan you need to apply to the right lender. Further, it’s crucial to check the repayment options and rates. The most important part of your loan process is the EMI as it is what determines your loan repayment.

What is EMI?
Equity Monthly Instalments (EMI) is one of the most popular means of repayment when it comes to loans. The EMI refers to the total amount paid every month until the tenure period is over. However, the EMI amount is a calculation of three factors: loan amount, tenor and the interest rate. These three factors play a very important role when it comes to calculating EMI.

Loan amount:
You cannot predict an emergency, economic downturn or competitive forces around your SME. Neither can you predict the funds you will need in order to overcome such hurdles.

So, you may need to borrow large funds at any given time. Now, depending on the amount you borrow, a financial institution will charge you interest at the prevailing rate leading to your EMI amount. In SME loans you can apply for a loan amount ranging INR 3 lakhs to INR 5 lakhs. However, the EMI that is charged can vary on the amount borrowed.

Tenor:
Tenor plays an important role during the loan process. In SME loans the tenor period lies between one to three years. However, you are free to choose any suitable loan period you are comfortable with. When selecting a loan tenor you must keep in mind the repayment capacity.

Interest rate:
The interest rate charged by each financial institution varies which means you won’t find two lenders offering similar SME rates for the same amount. Now, this makes it important for the borrower to research well and find a lender who charges the best possible interest rate to suit your needs i.e. the lowest interest rate on your business loan. Depending on the rate of interest charged the EMI amount will differ.

Three steps to calculate the EMI:

EMI calculator for a business loan is what must be used by every SME loan borrower as it not only helps to figure out your repayment capacity but it also helps the borrower to plan all the repayments. Now, there are three methods that can be used to calculate the EMI:

1. Formula:
As mentioned above, the EMI to be paid depends upon three factors - the total loan amount, the duration of the borrowed loan and the agreed rate of interest. A basic formula is used when calculating the EMI manually which is based on the three factors:
E = P x r x (1+r)n / ((1+r)n – 1)
wherein,
E = EMI payable (each month)
P = Principal loan amount
r = Rate of interest per month (i.e., annual interest is recalculated on a monthly basis)
n = Duration of the loan (in number of months)

2. Excel:
Some people also like to calculate their EMI amount on an excel sheet with the help of the above formula. However, when calculating the EMI you need to make sure that the digits entered are right as a small mistake can cause a huge financial loss.

Online EMI calculator:
If the above methods look quite complex, don’t worry, you can easily calculate the EMI with the help of a business loan EMI calculator. Many financial institutions offer online EMI calculators for free. When calculating manually there can be times when you may get stuck in complex calculations or miss a step while doing so. Nevertheless, the final result in a manual calculation can be wrong which can further cause you fiscal difficulties. Furthermore, calculating your EMI online can be easy and a simple task to do.

Here are a few easy steps that can help you estimate your SME loan EMI amount in minutes:

Step 1: Choose a loan amount. This will be the sum of money that you wish to borrow.
Step 2: Know the interest rate charged. The rate is most often set by the lender.
Step 3: Select the loan-period. A duration that will allow you to comfortably make your repayment, especially according to your convenience.
Step 4: If any processing fee charged mention that. Some lenders are likely to charge this fee.
Step 5: Visit your lender's website and find the EMI calculator page.
Step 6: Enter the digits carefully into the calculator and click the submit button.
Step 7: Here it is! Your estimated EMI amount.

Now that you know how to calculate your SME monthly EMI, you can easily apply for the loan and run your business without the fear of unavailable funds. Besides, a business loan EMI calculator makes your job easier in not only analysing your repayment capacity but also in planning your repayments accordingly. When applying for the loan you can also try visiting small and new financial institutions as they will have a lot of exciting schemes to offer you.

Read: 6 Quick Ways to Determine your Working Capital Needs for Successful Business