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Updated: October 7th, 2019
Getting a loan can help you grow your business, but figuring out the cost of paying off a loan isn’t always straightforward. In addition to paying interest on the funds you borrow, you may also have to pay a number of fees, depending on your lender and loan type.
Commonly overlooked charges include origination fees, processing fees, documentation fees, wire transfer fees, late payment fees, and prepayment penalties.
A prepayment penalty is a fee a lender charges if you pay off some or all of your loan ahead of schedule. If, for example, your sales skyrocket one year and you have enough cash to pay down your loan before your loan term is up, you may receive a penalty for doing so. That fee is usually a small percentage of your total loan amount.
While getting paid back early may sound like a good thing for lenders, charging interest is how most of them make a profit, so it behooves them to have borrowers pay on a predetermined schedule.
Mortgages and car loans typically have prepayment penalties, but fortunately, most small business loans don’t. Still, there are a couple of common types of business loans where paying early may come with fees.
Getting out of debt is appealing, but paying a loan early may not be the best financial choice for your business. There are numerous factors to consider when making your decision, including your interest rate and the cost of the prepayment penalty, as well as your business’ growth opportunities, finances, and goals.
You may want to consider paying off your loan early if:
On the other hand, consider keeping your loan payment schedule normal if:
There are both advantages and disadvantages to prepaying a loan. Weigh your options carefully and consider consulting a financial advisor to ensure you’re setting your business up for success.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.