Principal

Strip a loan back to its bones and there are only two things in it: the money you borrowed and the price you pay for borrowing it. The principal is the first of those. It’s the sum you owe the lender before any interest, and every repayment you make is measured against how much of it is left.

Government guidance on business.gov.au describes it as the part of the original amount still owing, excluding interest. Simple enough in theory. In business lending, though, the principal is often not the same as the cash you walk away with, and that gap is where borrowers get caught out.

Why the principal can be bigger than the cash you receive

Two common features of business loans pull the principal and the cash apart.

• Capitalised fees. An establishment fee, legal costs or valuation fees are sometimes added to the loan rather than paid out of pocket. That makes the principal larger than the money advanced, and interest is then charged on the fees too.
• Prepaid or deducted interest. Short-term property-secured lenders often take interest for the whole term up front as prepaid interest. You owe the full principal but receive a smaller amount on settlement.

Neither is unusual or sinister. They do mean you should compare offers on the amount of usable cash and the total dollars repaid, not on the headline loan figure.

A worked example

A Toowoomba earthmoving contractor needs about $195k to cover an ATO debt and a machine repair, secured against an investment property for nine months.

Line on the settlement statement	Amount
Principal on the contract	$210k
Establishment fee added to the loan	included in the $210k
Prepaid interest for the term, deducted	–$11k
Legal and valuation costs, deducted	–$4k
Cash paid to the borrower	$195k

The owner repays $210k at the end of the term, plus any fees on exit, even though $195k was the useful money. Seeing that $15k gap in writing before signing is the whole point of reading the settlement statement. Our loan cost comparison calculator helps put competing offers on the same footing.

How principal comes down

With principal and interest repayments, every instalment pays that period’s interest first and the remainder reduces the principal. Early on, the interest share is larger, so the balance falls slowly; later it drops quickly. On an interest-only loan, the principal doesn’t move until the end of the interest-only period or a lump-sum payout.

Paying extra reduces the principal directly, which lowers the interest charged from that point. Before doing it, check for early repayment costs on fixed-term loans. If you’re unsure what your current structure is costing, ask us to look at it.

Principal, interest and tax

Interest on money borrowed to run a business is generally deductible, while repaying the principal is not, because you’re only handing back borrowed money. Where the loan bought equipment or a vehicle, the deduction usually comes through depreciation on the asset rather than the repayments. That’s why lenders’ annual statements split the two, and why your bookkeeper needs that split.

Other meanings you might hear

“Principal” also turns up outside loan maths. Your ABN record lists a principal place of business, and in contracts the principal is the party an agent acts for. In this glossary, it always means the borrowed balance.

Related terms

Amortisation, loan term, repayment schedule, early repayment and refinance.

Know the number you need?

Once you know how much usable cash the business needs, rather than a round loan figure, the right structure becomes much easier to find. Pop that figure into our enquiry form. It’s about a minute’s work, and no credit check is run because you asked. We keep what you send in-house instead of auctioning it off to a dozen funders, and an actual person on our team reads it before picking up the phone. Honest turnover and security figures mean the option we suggest on that first call should actually suit you.

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