Thinking about paying off a small business loan early? It’s possible that you have heard financial ‘gurus’ talking about the importance of building a business with little to no debt, but as a rule that’s how the most successful businesses got their start. Not many of us are lucky to be born into wealth. It takes money to create a thriving business, even if it’s a small business. Securing small business loans can be a positive way to accomplish this. But paying off a small business loan early – that’s a whole other matter that needs careful consideration. Make sure you don’t hurt the business by paying off a small business loan too soon.
PAYING OFF A SMALL BUSINESS LOAN EARLY – WHY WOULD YOU WANT TO?
Let’s start by exploring some reasons why it may seem like a good idea to pay off a small business loan early.
YOU COULD GET A CASH WINDFALL
Imagine if you got some unexpected cash from an inheritance or playing the lottery? Maybe it’s tempting to pay off your debts, but before you do, think about all the other wonderful things you could do with that money – like going on a vacation or donating to a favorite cause.
DESIRE TO REDUCE BUSINESS DEBTS
As long as your business is profitable and you are working hard to build it, there is no advantage of paying off business debts now. Take your time, ride out the terms of your repayment plan, and reinvest your earnings into the business.
THINKING IT’S A GOOD THING FOR THE BUSINESS
Is it, really? Reducing debt can be a good thing, but if you pay your loans off early, it could put you into a bind in some other area of the business finances.
FEAR THAT THE BUSINESS COULD TANK
It’s natural to worry about the economy in a post-recession time and with the US presidential elections, but this fear is unfounded. The State of the Small Business Report published by Wasp Barcode Technologies shows that 71 percent of small businesses expect an increase in their 2016 revenues.
SOME PROS AND CONS OF PAYING SMALL BUSINESS LOAN OFF
Still not convinced? A few potential pros and cons of paying off a small business loan early, could include:
- Not having a regular cash flow – When you pay off your debts in a lump sum, there’s not much left to pay employees, or even yourself. You could find your credit rating and your reputation slipping fast.
- Operating debt free as a business – This can be a good thing during lean times, but it’s not a good regular business practice because sooner or later you will need an extra source of cash.
- Robs you of the chance to build a strong credit history – The credit bureaus look at factors such as length of loans when determining creditworthiness; take advantage of this.
PAYING OFF YOUR LOAN TOO EARLY CAN BE LIKE SHOOTING YOURSELF IN THE FOOT
A smart business owner will want to do whatever it takes to avoid jeopardizing the business. Running a business today is a lot like owning a loaded pistol; you could be shooting yourself in the foot without realizing it – that is if you aren’t careful. Here’s some of the dangers of paying off a small business loan way too soon.
- Early payoff fees – More fees? Yup, you read that right. Many small business loan terms include a penalty for paying things off too early. Make sure you read the terms of your loan carefully before getting yourself in trouble this way.
- Broken loan terms — No one wants to breach the terms of any agreement in business, as it can be costly and embarrassing. Know what you are signing up for before you agree to terms you cannot honor.
- Losing credit history building opportunity – Like mentioned earlier, paying your small business loan on time and over the life of the agreement is a better way to build business credit, especially if you have bad credit and want to rebuild it.
- No more tax credits – Your small business loan comes with certain tax advantages. You are not paying tax on future interest, just the ones you make. Pay the loan off too early and tax credits disappear.
- Trouble getting future loans – Sure, the debt will be gone, but according to a panel of financial experts at US News Money, there’s no guarantee more money will be available. Financial institutions may see someone who doesn’t have the ability to pay for the life of a loan.
ALTERNATIVES TO PAYING OFF SMALL BUSINESS LOAN EARLY
Everyone wants to do the most responsible thing with business capital. Luckily, there are some alternatives to paying off a small business loan too early. You may try, instead:
TAKING OUT A SECOND SMALL BUSINESS LOAN WITH A LOWER INTEREST RATE
There are a number of bad credit small business loan programs available for those who would like to build credit at an affordable rate, and even special small business loans for women business owners. If you are close to paying off another loan, instead of creating a deficit in the business accounts, take out a second low interest small business loan and keep paying the other loan on time every month.
SEEKING ANOTHER FORM OF FINANCING TO PAY DOWN DEBTS
In addition to small business loans, there are a number of other financial programs available for small business owners today. Consider a factoring program to get money towards outstanding receivables, merchant cash advances if your business accepts credit card payments, and more. Many of these lending opportunities don’t require a perfect credit score either.
PAYING SMALL BUSINESS LOAN ON TIME AND AS PER TERMS
Keep paying on your small business loan and be sure to carry out the full terms of the agreement you have with your current lender. If you choose to pay it off early, just know what the potential negatives are by talking with a member of the United Capital Source team first. We can help any small business owner with alternative ways to manage their cash flow and grow a stronger business.