Worked Examples and Checklists
Business term loan payments worked out: blended versus fixed principal in Canada
A worked example of a Canadian business term loan repaid by blended payments and by fixed principal plus interest, year by year, with prepayment and term-versus-amortization explained.
A Canadian business term loan is usually repaid in one of two ways. With blended payments, every monthly payment is the same and the interest share falls over time. With fixed principal plus interest, which many BDC and bank term loans use, you repay the same amount of principal every month plus interest on what is left, so payments start higher and fall. On a $150,000 loan at 8.5% over five years, fixed principal saves about $2,240 of interest but costs about $4,650 more in payments in the first year. The right choice depends on your cash flow in the early years.
This guide is part of the business loan application checklist. All figures are illustrative.
The loan
- Amount: $150,000 for kitchen equipment in a Calgary catering business
- Rate: 8.5% a year, fixed, compounded monthly
- Repayment: 60 months
Method 1: blended payments
Payment = P x r / (1 − (1 + r)^−n), with r = 8.5% / 12 = 0.7083% and n = 60.
Payment = $3,077.48 a month, $36,930 a year.
| Year | Payments | Interest | Principal | Balance at year end |
|---|---|---|---|---|
| 1 | $36,930 | $11,785 | $25,145 | about $124,855 |
| 2 | $36,930 | $9,563 | $27,367 | about $97,489 |
| 3 | $36,930 | $7,144 | $29,786 | about $67,703 |
| 4 | $36,930 | $4,511 | $32,419 | about $35,284 |
| 5 | $36,930 | $1,646 | $35,284 | $0 |
| Total | $184,649 | $34,649 | $150,000 |
Method 2: fixed principal plus interest
Principal each month = $150,000 / 60 = $2,500. Interest = balance x 0.7083%.
- First payment: $2,500 + $150,000 x 0.7083% = $2,500 + $1,062.50 = $3,562.50
- Last payment: $2,500 + $2,500 x 0.7083% = $2,517.71
| Year | Payments | Interest | Principal | Balance at year end |
|---|---|---|---|---|
| 1 | $41,581 | $11,581 | $30,000 | $120,000 |
| 2 | $39,031 | $9,031 | $30,000 | $90,000 |
| 3 | $36,481 | $6,481 | $30,000 | $60,000 |
| 4 | $33,931 | $3,931 | $30,000 | $30,000 |
| 5 | $31,381 | $1,381 | $30,000 | $0 |
| Total | $182,406 | $32,406 | $150,000 |
Run the same comparison with the fixed-principal calculator and the blended payment calculator.
Comparing the two
| Blended | Fixed principal | |
|---|---|---|
| Year 1 payments | $36,930 | $41,581 (+$4,651) |
| Year 5 payments | $36,930 | $31,381 (−$5,549) |
| Total interest | $34,649 | $32,406 (−$2,243) |
| Balance after 2 years | about $97,489 | $90,000 |
Fixed principal is cheaper overall because the balance falls faster, but the first year is the hardest, and the first year after buying equipment is often when cash is tightest. That shows up in the debt service coverage ratio: the lender tests your ratio on the higher early payments.
Choose blended if you want predictable payments and the early years are tight. Choose fixed principal if cash flow is comfortable now and you want to owe less sooner, for example to sell the business or refinance in a few years.
Term and amortization are not the same thing
On many business loans, the amortization (the period used to calculate payments) is longer than the term (when the loan matures and must be renewed or repaid). A commercial mortgage might be amortized over 20 years with a 5-year term. At the end of the term the remaining balance must be renewed at a new rate or refinanced, so you carry renewal risk. Ask for both numbers in writing.
What prepaying does
If the catering business pays an extra $20,000 at the end of year 1 on the blended loan and keeps paying $3,077.48 a month, the loan is paid off in about 52 months instead of 60, and total interest falls to about $27,360, a saving of about $7,290. Before planning a prepayment, check the agreement: floating-rate loans are often open, while fixed-rate loans commonly carry a penalty such as three months' interest or an interest rate differential. See refinancing an expensive business loan.
Payment frequency and seasonality
Some lenders, including BDC, offer seasonal schedules (lower or no principal in slow months) or a short principal holiday at the start while new equipment ramps up. These help cash flow but add interest, because principal stays outstanding longer. If you ask for one, ask the lender to show the total interest under each schedule.
A checklist for reading the repayment schedule
- Blended or fixed principal?
- Monthly, weekly or seasonal payments?
- Fixed or floating rate, and how payments change if prime moves?
- Term versus amortization, and what happens at maturity?
- Prepayment rights: how much can you repay each year without penalty?
- Any interest-only or principal-deferral period, and what it costs?
Frequently asked questions
Why does my lender quote fixed principal when I asked for a monthly payment?
Many business lenders default to fixed principal because the balance falls faster. Ask for a schedule showing the first, the average and the last payment.
Can I switch from fixed principal to blended later?
Only if the lender agrees, usually as an amendment. Ask before signing if flexibility matters.
Does weekly payment save money?
Paying weekly or biweekly reduces interest slightly because principal falls sooner, but on business loans the effect is small compared with rate and term.
What happens to the schedule if prime changes?
On fixed principal loans only the interest part moves. On blended floating loans, the lender either recalculates the payment or changes the payoff date.
Sources
- BDC — business loan repayment options and calculators
- Justice Laws Website — Interest Act rules on stating the annual rate
- Financial Consumer Agency of Canada — how loan interest and amortization work
