Interest

Definition

The periodic rate received by the creditor on the money loaned.

What It Means

The interest is the premium the lender receives in exchange for offering the money to the borrower. The interest is established as a percentage of the money loaned, called the principal.

Interest is a tax-deductible business expense, which makes the cost of debt capital cheaper than equity. However, the requirement to make the debt installment payments regularly must be met for successful business operation.

This is especially important if a small business is purchased with borrowed money, such as seller’s note or bank financing. The ability of a business to meet its debt obligations is measured by the debt service coverage ratio.