There are key factors to put into consideration when taking a loan, one of which is the return on investment from a loan known as ROI. Calculating ROI on a business loan falls under basic accounting, it will take into account how much you will invest, the profits and impact you will get from that investment.
It is advisable to consider a loan as a form of investment, that way it can be seen as an ‘asset’ and used towards productivity and profit. Although, ROI has a certain level of risk that you need to consider before making it work for your business. It is beyond just having an appetite for a loan, it is also about planning effectively because a business loan can positively affect the growth of your business if you are able to manage the loan repayments while boosting the profits of your business.
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 is buying goods you can sell on your ecommerce store. If you loaned N200,000 to buy these goods and foresee that you can profit N120,000 from them, your ROI would be (120,000 / 200,000) x 100 = 60%.
To get a more accurate result in calculating your ROI, you have to consider additional variables. You will have to budget the cost of the investment such as the interest rates, monthly repayments, and fees charged by the lender.
From the previous example, let’s say the loan has an interest rate of 2.5% that has to be paid within 12 months. The cost, including interest and fees, would total to N15,600. Your overall investment would be N200,000 + N15,600 = N215,600.
Your projected profit of N120,000 from the N200,000 loan, minus fees of N15,700, would net N64,400.
To make a more accurate calculation of the ROI: (Net Profit / Investment) x 100 = ROI (%)
(64,400 / 215,700) x 100 = 29.86%).
You still get a profit from the loan, with an ROI of 29.86%.
In real life, the scenarios can have multiple variables but the goal is to view a business loan as an investment to generate returns higher than its interest rate.