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.

How to Calculate ROI on a Business Loan

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. 

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 to Calculate ROI on a Business Loan

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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