Return on borrowed capital calculator

What this calculator does

This calculator answers the only question that matters when you borrow for growth: will the money earn more than it costs? You enter how much you intend to borrow, the total cost of the finance over the term, and the extra gross profit you expect the money to generate. It returns your net gain after finance costs and your return on borrowed capital as a percentage.

It reframes borrowing the way a finance director should see it — not as a debt to be feared, but as an investment with a cost and an expected return. Sensible borrowing has a positive net gain and a return comfortably above the cost of the finance. If the numbers do not clear that bar, the answer is to wait, borrow less, or find a cheaper or higher-yielding use for the money.

How to use it

Enter three figures:

• Amount borrowed — the facility or loan principal you are considering.
• Total cost of finance — all the interest and fees over the life of the borrowing, not the headline rate. A true cost of borrowing calculator will give you this figure if you only have a monthly rate.
• Expected extra profit — the additional gross profit (revenue minus the direct cost of delivering it) you realistically expect this money to unlock over the same period. Be conservative.

The output shows whether you come out ahead, by how much, and what return the borrowing earns. Use the same time period for cost and profit so the comparison is fair.

The formula in plain English

The logic is simple arithmetic dressed up as a decision:

Net gain = Expected extra profit − Total cost of finance
Return on borrowed capital = Net gain ÷ Amount borrowed × 100

If the net gain is positive, the borrowing pays for itself and leaves something over. The return percentage lets you compare very different opportunities on a level footing — a £10,000 facility that nets £2,000 (20%) is working harder per pound than a £100,000 facility that nets £5,000 (5%), even though the second produces more cash. A useful rule of thumb: the expected return on what you do with the money should clear the cost of the money with room to spare, because your profit forecast is never as certain as the lender’s fee schedule.

A worked example

A wholesaler is offered a bulk-buy discount: commit to a larger order now and the supplier knocks the unit cost down. The firm needs £40,000 of working capital it does not have to hand, so it considers a short-term Credicorp Flex facility.

• Amount borrowed: £40,000
• Total cost of finance over the term: £3,200 (illustrative)
• Expected extra gross profit from the discounted stock: £9,000

Net gain = £9,000 − £3,200 = £5,800. Return on borrowed capital = £5,800 ÷ £40,000 = 14.5%. The deal stands up: even if the profit came in 30% below forecast, at £6,300 the firm would still clear the £3,200 cost. That margin of safety is what turns a plausible idea into a fundable one.

Reading the result and what it tells you

A positive net gain means the borrowing is, on your own forecast, profitable — the money earns its keep. The return percentage tells you how efficiently it does so, and lets you rank competing uses of the same finance. A near-zero or negative result is a clear signal to stop: the cost of the money is eating the profit it generates.

Crucially, build in a margin of safety. If a small dip in your profit forecast flips the answer negative, the case is too fragile — your forecast is an estimate, but the finance cost is contractual. Short-term, self-liquidating uses (funding a profitable order, bridging a supplier discount, smoothing a seasonal gap) tend to score well because the borrowing is repaid by the very activity it funds. Borrowing to cover standing overhead rarely does, because there is no new profit to set against the cost. Credicorp lends to the company, with no personal guarantee, so this is a company-level investment decision — keep it on those terms.

Limitations to keep in mind

The calculator is only as honest as your profit estimate, so guard against optimism:

• It uses your expected extra profit. Stress-test it — model a pessimistic case as well as your base case.
• It compares totals over a period, not timing. Even a profitable deal can strain cash if the borrowing is repaid before the profit arrives; check the gap with a cash-flow forecast.
• It looks at one opportunity in isolation. The real comparison is against the next best use of the same money, and against doing nothing.

This is educational, not financial advice. Used well, though, it stops two costly mistakes: borrowing for things that do not pay, and turning down borrowing that clearly would.