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Should you pay off your business loan early?

Will paying off your business loan early save you money or cost you more? Find out in our guide.

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One of the most notorious features of personal and business loans is an early repayment or prepayment fee. This is when you are charged a fee if you decide to pay back your whole loan earlier than agreed.

Repaying ahead of schedule can save you money on interest and gets you out of debt sooner, but it also means less money for the lender than they expected. To compensate, some lenders impose strict early repayment fees if you pay back sooner than you need to. Discharge fees may also come up when you finish paying back the loan and the account is closed earlier than expected.

If there’s a chance you might pay back your loan sooner than is stipulated in its terms and conditions, you may want to check to make sure there are no prepayment or discharge fees involved.

Which lenders allow you repay early without penalty?

Short-term business loan

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You can pay off your loan at any time, but you’ll still pay the full fee based on the original loan term.

Fixed-term loans, SBA loans, lines of credit, commercial mortgage financing, invoice financing and more

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Dependent on the type of financing.

SBA loans

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None.

Merchant cash advances, term loans, equipment financing, invoice factoring, SBA loans, business lines of credit, startup loans

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No early payment fees for business loans. Early payment penalties apply for SBA loans.

Term loan

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None.

Line of credit

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None.

Business cash advance, lines of credit, collateralized loans, equipment financing, consolidation, healthcare cash advance

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None.

Term loans, lines of credit

No

With a fixed fee amount, clients will not benefit from early repayment.

Lines of credit, invoice financing

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No prepayment penalty, all remaining fees are waived. Only pay the remaining draw amount plus one weekly fee will be debited from your account on the upcoming payment date.

Is early repayment worth the fees?

Generally speaking, if your lender has no prepayment fees and no discharge fees, you can save money by paying the entire business loan back sooner. If your lender does have early repayment or discharge fees, then it might still be possible to save money with early repayments or it could end up costing you even more. It would depend on how much you have left on the loan and what the penalty fee is.

Here’s how to calculate if it’s worth it:

  1. Determine how much you could save with early repayment. Add up the total amount you will spend on interest over the rest of the loan period and factor in any ongoing fees. This is the total amount you might save if you were to repay it all today.
  2. Subtract any prepayment or early discharge fees from the amount you can save. Pay close attention to the type of fee it is (percentage or flat) and do not assume that all lenders have similar costs.
  3. The amount you are left with is the value you will save if you pay off your loan early. If the figure is negative, it means that repaying your loan early will actually cost you more than it will save you.

Case study: J.P. saves big

Imagine this scenario: J.P. has a general contracting business in a coastal town that covers top-to-bottom home repair and offers everything from roofing to plumbing. Business was always steady until a hurricane swept the coast and damaged many homes – leaving them in desperate need for repair. Only having two employees, he realized he needed to hire three more to keep up on home repairs so he wouldn’t lose customers. He took out a loan from SmartBiz for $50,000 at an APR of 6.5% for a 10-year term. J.P got charged a 2% loan packaging fee that came out to $1,000 and expected to pay $567.74 a month. All said and done, the loan would have an additional $19,129 tacked on with interest and fees.

Business ramped up and J.P. paid off the loan six years early, saving $7650.40 on missed additional interest. The loan would have cost him $69,129, but instead only cost him $61,478.60.

How to maximize your chances of saving money:

  • If you want the option of repaying a loan early, it can be worth looking for a lender that doesn’t charge prepayment fees. Don’t forget to compare the benefits and interest rates too.
  • Use an online calculator to see how certain repayment options can help you save more money. Ideally your chosen repayment plan will be perfect, but choosing a provider without early repayment or discharge fees is a good way of planning for the best.

Pros and cons of repaying your loan early

It might seem like a good idea to pay back your business loan early, but even if there are no prepayment or discharge fees it might not be in your best interest.

  • Save money by paying less interest.
  • Your business credit score could improve if you are debt-free.
  • It will free up money to reinvest in your business.
  • You may be able to get a new loan with better rates and terms elsewhere.
  • You can avoid ongoing fees.
  • Interest paid on business loans is tax deductible and you will lose this tax deduction. If this affects your tax bracket then it might cost you more than it saves you.
  • You may need more financing after closing the loan. The last thing you want to do is repay a loan early only to have to take out a new one because business is slow and you have no cash reserves.
  • Early repayment and discharge fees may apply and can be substantial. In some cases, this could be a set percentage of the remaining balance, which can make big early repayments entirely unsuitable.

Bottom line

Early repayment isn’t always the right option and providers without prepayment fees are not always an ideal choice. However, it is an important factor to consider when comparing business loans. Even if you choose not to use the benefit, simply having the option of paying a loan back early without worrying about hidden costs could be good for peace of mind.

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