New Debt Payment Term
Debt finance is normally evidenced by a note or document which specifies the amount, interest rate, and date of payment. The date of payment will dictate the payment term for the debt, for example a debt might be repayable in three years time.
New Debt in the Financial Projection
In the previous step the new debt was entered and, in order to allow for this debt to be repaid, a new debt payment term needs to be entered alongside it. For example, if the business plans to buy new equipment, it might plan to take out a five year loan to pay for this, and a term of five years would be entered.
For simplicity, all new debts are paid off over the same term. Whichever term you choose to use, the important thing is to get a best estimate and start the projection. At a later stage, the value can be amended if payment terms need to be adjusted to satisfy the lenders requirements or to improve the cash flow.
As a guide, it is normal to try and match the term of the debt with the life time of the asset it is being used to pay for. For example, a machine with a useful life of four years might be matched with a four year loan, whereas a property purchase might require a twenty five year mortgage.
Having entered the new debt payment term, the template calculates the new debt principal and interest payments for each subsequent year using a loan amortization schedule. It should be noted that new loans are assumed to be available at the start of each year, and loan repayments are assumed to occur at the end of each year.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using the financial projections template, is to enter the new equity capital used to help fund the business.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business plan.