Calculating the weighted average effective interest rate for small businesses with multiple overdrafts, loans, and other liabilities can be a bit tricky, but it's definitely doable. Here's how you can calculate it:
- List all of the loans, overdrafts, and other liabilities that the business has, along with the amount of each loan and the interest rate for each loan.
- Multiply the amount of each loan by its corresponding interest rate to get the interest expense for each loan.
- Add up all of the interest expenses to get the total interest expense for all of the loans.
- Add up all of the loan amounts to get the total amount of all of the loans.
- Divide the total interest expense by the total amount of all of the loans to get the weighted average interest rate.
For example, let's say a small business has three loans:
- Loan 1: $10,000 at 5% interest
- Loan 2: $5,000 at 7% interest
- Loan 3: $15,000 at 4% interest
To calculate the weighted average effective interest rate, you would do the following:
1. List all of the loans and their interest rates:
- Loan 1: $10,000 at 5%
- Loan 2: $5,000 at 7%
- Loan 3: $15,000 at 4%
2. Multiply the amount of each loan by its corresponding interest rate:
- Loan 1: $10,000 x 0.05 = $500
- Loan 2: $5,000 x 0.07 = $350
- Loan 3: $15,000 x 0.04 = $600
3. Add up all of the interest expenses:
- $500 + $350 + $600 = $1,450
4. Add up all of the loan amounts:
- $10,000 + $5,000 + $15,000 = $30,000
5. Divide the total interest expense by the total amount of all of the loans:
- $1,450 / $30,000 = 0.0483, or 4.83%
So the
weighted average effective interest rate for this small business is 4.83%.