Interest

Interest is the fee a business pays a lender (creditor) to borrow money. Interest payments are usually based on the outstanding balance of a loan and paid monthly, though many different arrangements are possible.

Interest is usually calculated as a percentage of the loan balance at an agreed-upon interest rate. These rates may be fixed (i.e., set at a specific value) or floating (variable over time).

Interest is always expensed before taxes—meaning it is covered using pre-tax dollars. This makes borrowed money a relatively inexpensive form of capital. That said, interest rates are will rise to match risk. As risk of non-repayment increases, so do borrowing costs.

More about interest

In a simple interest-only scenario, if a company borrows $100,000 at a 5% interest rate, its annual interest expenses would be $5,000 (or $416.67 per month).

More complex loans involve paying interest as well as some portion of the original amount borrowed (the principal) on an amortized basis. The table below shows the payment schedule for a $100,000 loan at 5% with a three-year amortization: