An amortization schedule is a table or chart that shows each loan payment throughout the life of the loan. These payments are broken down to show how much will be allocated to the loan’s principal and accrued interest charges, as well as the new loan balance after each subsequent payment. A schedule can be used to show how much interest will be paid on the loan each year and give business owners more visibility into how long it will take before the loan is fully paid off.
Amortization schedule example
Below is a sample of what an amortization schedule can look like. You can see that the loan will be paid off after the 12th payment. Additionally, out of the total payment amount of $1,284.11, the final payment has just $5.33 applied toward interest charges, with the remaining $1,278.78 going toward the principal balance of the loan.
Screenshot of an amortization table generated with the Fit Small Business SBA 7(a) loan calculator
The benefits of an amortization schedule
Understanding an amortization schedule can help a company plan its finances. Amortization on a loan is an important concept to understand because it can have various impacts on a company’s finances. It can help from a tax planning perspective, enable business owners to estimate the loan amount needed for a subsequent refinance, and allow for more insight into how additional payments can affect the loan payoff date.
✅ Tax deductibility of interest
In many cases, businesses can deduct interest charges from taxable income. Since an amortization schedule breaks down the amount of interest charges expected to be paid each year, it can be used to help a business owner determine what the impact on the company’s cash flow will be once income taxes are taken into account.
Applying this knowledge to your company’s financial statements can also help improve its odds of landing a loan approval, as having sufficient cash flow is one of the common small business loan requirements in determining a company’s ability to repay debt.
✅ Subsequent refinancing
If you’re a business owner thinking of refinancing, an amortization schedule can help you determine how much of a loan you’ll need based on when you decide to refinance, something you’ll need to know in getting a small business loan. This is because an amortization schedule shows the loan balance will change after each subsequent payment is made.
Refinancing is a common practice as it carries multiple benefits. It can help you lower monthly payments, save money on interest charges, or get more predictable payment amounts if you’re switching from a variable-rate loan to a fixed-rate loan.
✅ Early payoff
Paying off a loan more quickly can free up cash flow to be invested in other areas of your business. Businesses trying to pay off a loan faster can use an amortization schedule and calculator to see the impact of additional payment amounts and how it will affect the loan payoff date.
Where to find and create an amortization schedule
An amortization schedule will generally be issued to you when you get a loan. You can also find various online websites that will generate an amortization schedule based on the terms of your loan.
However, you can also create your amortization table using something like Microsoft Excel. Our team has created a free loan amortization Excel template for your use, and it allows you to generate your own amortization schedules by entering terms of a loan.
Types of amortization
The type of amortization on a loan can determine a loan’s payoff date and how each loan payment is allocated to the principal and interest portions of the loan balance. Below are four common types of amortization that can be offered.
1. Fully amortized loan
This is the most common type of amortization. A fully amortized loan means that the loan balance will be $0 at the end of the loan term, and payments are typically made in equal installment amounts over the life of the loan. Although payment amounts can remain the same, earlier payments will have a larger portion applied to interest charges. With each subsequent payment, a larger amount will be allocated toward the principal balance.
2. Fully amortized loan with deferred principal payments
This carries an interest-only payment component. Generally, this loan will have an introductory period wherein payments cover only the accrued interest charges. Since no amount is applied to the principal portion of the loan, this can help business owners seeking lower monthly payments. Once the interest-only period has expired, this loan will typically then be fully amortized over the remainder of the term, with payments covering the principal and interest portion of the loan.
3. Partially amortized loan within a balloon payment
When a loan is partially amortized, the loan will still have a balance at the end of the repayment term. At that point, the remaining balance must be paid in full — and this final payment is typically referred to as a balloon payment. In many cases, the final payment can be satisfied by refinancing to another type of loan.
4. Negatively amortized loan
A negatively amortized loan is one in which the payments may not be enough to cover the full amount of accrued interest charges. As a result, the balance of the loan can go up even if all of your payments are made on time.
Amortized vs non-amortized loans
The main difference between an amortized loan and a non-amortized loan is that a non-amortized loan does not have a set payoff date. A common example is a personal or business credit card, where you can continuously make charges to your account and are only required to make a minimum payment based on a percentage of your outstanding balance.
Frequently asked questions (FAQs)
An amortization schedule breaks down how payments are applied to a loan. It will show how much of each individual payment is applied to the corresponding principal and interest portions of a loan, the new outstanding loan balance, and when the loan will be paid off.
A fully amortized loan is one in which the loan balance will reach $0 at the end of the repayment period. Payments on partially amortized loans, by comparison, will be insufficient to fully pay off the loan at the end of the term.
This is an indicator that the loan has a balloon payment at the end of the repayment period. For example, a 5-year loan amortized over 20 years means that payment amounts are divided over 20 years, but because the loan is due in 5 years, you’ll need to make a single lump-sum payment to satisfy the loan balance.
Bottom line
Understanding the ins and outs of amortization and how to work with an amortization schedule can yield many financial benefits for a business owner. You’ll be able to plan for tax deduction purposes, better understand your options for subsequent refinancing, and have a greater overall ability to optimize your company’s cash flow.
