Are you considering paying off a small business loan early? There’s a good chance that your business obtained a loan early in the formation of your company and you’ve been faithfully making monthly payments. The Small Business Credit Survey, a collaboration of the Federal Reserve Bank and multiple banking organizations across 26 US states, indicates that 25% of all startup companies experience cash flow issues in the first two years. Additionally, the report shows that small business loans are the primary way that companies find the capital they need to grow.Do you want to pay your loan off early? Why? Maybe you are in a position where your company has come into a large amount of money that you can use at your discretion. Or perhaps you are in the process of paying off debts to improve your credit rating. For each business owner, this needs to be a good business reason.
IS IT A GOOD TIME TO PAY OFF A SMALL BUSINESS LOAN?
Fortunately, there are some questions you can ask before paying off a small business loan early, to make the best decision for your business.
What are the terms of your loan?
Read the fine print, again. Get a copy of your loan agreement and read through it carefully to determine if there are any issues with paying your loan early. Some small business loan terms state that any early payment on the loan must be taken care of in the first 90-days of the loan.
Are there pre-payment penalties?
This is a problem that many business owners don’t realize and it’s when the small business loan includes a pre-payment penalty. This can either be terms that the loan must be paid over a certain amount of months with an incentive to forgive the interest; or a loan that has an early payoff fee assessed.
Are there discounts/will I save money by paying my loan early?
If you can pay the small business loan in full without incurring any additional fees, interest, or penalties – then this can be a good thing. But consider that you could just keep paying on the loan interest free and bankroll your savings and earn interest on it too.
How will paying my loan early impact my business credit?
Potential creditors look at several factors when evaluating the creditworthiness of business owners. They look for a solid repayment history. They look for a low debt and high income ratio. And they look for multiple credit accounts in good standings. Paying a loan off early doesn’t necessarily help improve credit.
Will I be able to get additional loans in the future?
When determining if you should pay your small business loan early, you will want to find out if you will be able to do business with the financing company or bank again in the near future. There will come a time you will need to.
Are there alternatives to paying my loan early?
There are some alternatives to paying your small business loan early. If monthly payments are too much, the funder can refinance the payment to reduce payments. The business can take out a second small business loan, with a lower interest rate, and pay other loans off. Or the business owner can seek out other types of funding while making regular payments on the existing loan.
How does this affect any tax shelters I may be eligible for?
It’s important to note that paying a loan on a regular basis has a tax shelter, in the form of loan interest. According to the IRS, a pre-payment fee on a small business loan is tax deductible, but once it’s paid in full the deduction goes away.
How do I know how much my early payoff amount is?
After weighing all the odds, if you still plan to pay off your small business loan early, naturally you will want to know how much is due. There are a few ways to determine this, again refer to the terms of your loan agreement.
- Percentage of remaining loan balance – This can be anywhere from 10 to as much as 40 percent. Do the math. If you have a 20 percent prepayment fee and currently owe $23,000 on the small business loan, then you can expect to pay a $4,600 fee on top of your loan balance, to the tune of $27,600.
- Lump-sum 90 day option to pay early – If you exercise an early payoff in the first 90-days of a short term business loan, you may be assessed a fee for this option. The fee is generally attributed to a portion of the loan interest. Ask your lender for a copy of your amortization schedule, which shows what you’ve paid and what you owe, along with any additional fees.
- Short term loan penalties and other fees to watch for – While not as common, some small business loans include short term penalties and other fees, which may be calculated on a sliding fee scale. Longer loans with fixed-rates are most prone to see this type of penalty, so you may be in the clear with a short term loan.
FINDING ADVICE AND HELP TO PAY A SMALL BUSINESS LOAN EARLY
Once you have had a chance to review the terms of your loan, have checked into any early payoff penalties and fees, and talked it over with the decision-makers at your business; you can seek expert guidance at United Capital Source. We have a variety of options for small business loans and funding programs that can save you time and money.