What Is Loan Principal and Why Is It Important?

A standard small business loan has two parts: principal and interest. An understanding of both elements plays a large role in the success of your business and your financial well being going forward. Pango Financial is here to answer two critical questions for you: what is loan principal, and why is it important?

Principal: The Basics

Think of principal as the amount of money you borrow. It’s a static dollar amount that will help you either get your new business off the ground or bolster your existing business. The principal is the amount of money you’ll have to pay back over time.

Principal vs. Interest

Interest is the second primary component of your loan. It’s a percentage rate that the amount of the loan and your own creditworthiness determine. A strong credit score will lower your APR (annual percentage rate), and you’ll be able to pay back your loan more easily without accruing too much interest.

What Happens to It?

First, you use the loan to expand your business. Securing new business startup funding will generate cash for initial or growth costs. In the meantime, you’ll pay down that loan every month or every quarter.

As you pay off your loan, you’ll see on your statements that the principal—that dollar amount—starts to go down. Eventually, that number will reach zero, and you won’t need to factor loan payments into your budget.

Managing Your Principal

Some lenders will charge fees for paying off your loan principal more quickly (after all, they like to collect those interest payments for as long as possible). Luckily, others will be glad to see you reducing that principal.

If you make larger loan payments towards that principal, then you won’t accrue as much interest. Paying off the loan will be cheaper for you and allow more financial flexibility for your business.

Securing funds for your startup or existing business often leads you to a bank or lender. Small business loans are a great way to get that capital quickly. Look closely at the terms of your loan; consider both the amount that you want to borrow and the interest rate. Now that you know what loan principal is and why it’s important, you have the power to make smarter decisions that fit your business best.