Calculate Loan Scenario Profitability

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Should you Borrow Money to Grow your Small Business

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What happens here

Consider a hypothetical scenario where you borrow $100,000 to start your company with an assumed 10% interest rate on the loan. Calculate your projected total sales (e.g., $100,000) and then apply your estimated profit margin (e.g., a typical contractor's 10% profit margin). Determine the gross profit. From this gross profit, subtract the interest payment to the bank. The video illustrates that if your gross profit equals the interest payment (e.g., $10,000 profit from $100,000 sales at 10% margin, and $10,000 interest on a $100,000 loan at 10%), your net profit as the owner would be zero. If your profit margin is slightly higher, say 12%, then a 10% interest rate would leave you with only 2% net profit.

Goal: Quantify the net profit when starting a business with a loan, factoring in interest payments.

Tools and materials

Calculator Any — Performing financial calculations (e.g., interest, profit margins)

What they say

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ready so the two main types of loans that you're going to probably come across is what's called a general business loan and this is a loan that the bank gives you money just to do the operating expenses of the company and Equipment purchases loans which is more specific toward um you know exact pieces of equipment that you want to buy doesn't make a difference what the loan is let's just say that for today's example it's a 10% interest rate and I need you to wrap your head around this because this is where we get into the numbers and we want to make sure that we're clear on all of this now I know a 10% interest rate seems a little high but we're just using this for an analysis not for actual Hardon numbers hard on um anyway let's just say that you get these loans at 10% and I'm going to ask you next what is the average amount of profit that a company usually takes is it 10% as well yes the average write up on top of your proposals is 10% so do you start to see the see the connection between the dots so let's be very clear with this connection the banks are charging you 10% interest and you're charging 10% profit on a project so let's just rename it for what it is the banks are charging 10% profit on your jobs do you see that so if you borrow $100,000 the banks make 10% profit I don't care how else you put it you can call it interest I call it for what it is it's the exact same thing that you do on $100,000 job so now you no longer get to keep 10% profit on your projects because you're giving it to the bank so now if you as the owner as you as the person taking all the risks you as the person getting up in the morning doing all the hard work you want to put anything in your back pocket at the end of the day you have to make 12% profit you no longer can make those slim 10% margins because you've opted to borrow and you've opted to give that 10% to the bank so now at 12% really what you get to keep as the owner of the company is 2% 12% minus the 10% you give to the bank leaves you the owner doing all the work with 2% doesn't sound like too good of a deal so far does it all right let's get into number

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