Article by Roger Schlueter, MBA
Weighted Average is an average based upon the individual portion as a percentage of the whole.
Example:
Lets say that we decide to borrow money with a bank or the SBA (U.S. Small Business Administration). We are are combining several different Assets into one loan. These different Assets each have their own term of life or period for you to pay the Asset off.
Working Capital* $ 5,000 5.0%
Equipment $ 15,000 15.0%
Real Estate*2 $ 80,000 80.0%
Total $100,000 100.0%
First we take the Assets and their percent of the total loan.
Working Capital* 10 Years x 5.0% = 0.50 years
Equipment 10 Years x 15.0% = 1.50 years
Real Estate*2 25 Years x 80.0% = 20.0 years
Total 100.0% = 22.0 years
Secondly we take the Assets life in years and multiply that times the percentage. This is the years for each Asset. Then we add them up and get a term for a loan with different Asset life. A weighted Average.
* We used the SBA Term for Working Capital. Most Banks will go only 3 -5 years.
*2 We used the SBA Term for Real Estate. Most Banks will go only 20 years.