Interest Rates for your Business Plan
Interest is an expense of the business, it is the cost to the business of using a lender’s money. The percentage rate of interest or interest rate is the cost of borrowing for one year. The interest expense shown in the income statement of the financial projections template is based on the average debt balance during the year multiplied by the interest rate.
How to Obtain the Interest Rate
How you decide on an interest rate to use will depend on whether your business is already existing and operating, or is a new start-up business with no previous history.
If you are an existing business the starting point should be the interest rate on current loan facilities. These are normally quoted as a percentage over the current base rate.
For example if your ongoing loans have been agreed at 4% over the base rate and the current base rate is 0.5%, then the starting rate to use in the business plan would be 4.5%.
New Start-Up Business
If this is a new start up business and there is no historical information on interest rates, try applying one of the following techniques.
- Use information from similar businesses, trade associations, company accounts.
As a rough guide, from the company accounts, take the interest expense in the income statement and divide this by the average of the opening and closing debts to give an estimate of the interest rate used.
- Industry benchmark data and statistics.
- Contact banks for quotations or check their websites for indicative interest rates.
- If all else fails, use a best guess, this is planning not accounting.
Interest rates will vary significantly depending on the type of business, the purpose of the loan, security available, and the ability to repay. This is discussed in our blog post on financial projections for a bank loan proposal.
Whichever method you use to estimate the interest rate, the important thing is to get a best estimate and start the financial projections. If the proposal is submitted to a bank for a loan the interest rate will be discussed at the time, and the initial estimate can be adjusted.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to find the tax rate to be used to calculate the taxation expense for your 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 model.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.