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The answer, then, is $110 (because $10 is 10 percent of $100 and interest is accrued annually for only one year).
If a company absolutely must raise capital but can’t generate enough value to pay back the interest rate, it’ll end up losing money on the loan. As a result, it might want to pursue an alternative option for raising capital, such as selling equity.
Looking at loan terms
You have a few different options available when choosing a loan for your company. To make the best choice for your company, you need to be aware of the pros and cons of each loan type. If you’re not sure which one is best for you, ask a professional analyst — not the person trying to sell you the loan. Here are some terms you need to be aware of:
Fixed versus variable rate: When you take out a fixed-rate loan, the percentage interest you pay will always be the same. For example, if you take out a loan with 5 percent APR (annual percentage rate, which is your annual interest rate), then you will always be charged 5 percent interest per year. With a variable rate loan, the interest rate you pay will change; the amount of change depends on the type of loan. Variable rate loans come in many types, and their rates change based on another interest rate, a stock market index, your income, or some other indicator. Some increase gradually over time, while others start low and jump after a period of time (these are called teaser-rates). While the wide variety of variable rate loan options is great news for the financially inclined, these types of loans can be very dangerous for beginners. The amount of information and the calculations involved in predicting the movement in variable interest rates can be a deceptively daunting task, even for experienced analysts.