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After a potential moneylender receives the corporation’s loan application, an interview process typically occurs, along with an underwriting process during which the potential lender assesses the borrower for risk, financial ability to repay the loan, credit history, and other variables. If the lender approves the loan application, the money is deposited in the corporation’s bank account, making it available for use by the corporation in a manner consistent with the original proposal.

The responsibility for making sure a particular loan is beneficial to a company lies with that company. Every loan, except for those rare federally subsidized loans in which the government pays for the interest, incurs interest, meaning you and your company pay more money back to the lender than the lender originally gave you.

Here’s a quick look at how interest works:

This equation says that the balance (B) is equal to the principal amount (P) times the rate (r) exponentially multiplied by time (t). So, if your company borrowed $100 at an interest rate of 10 percent for one year without making any payments, then the amount of money your company owes at the end of that one year looks like this: