A small business loan is a lifeline for many business owners. It provides much-needed funds at the hour of need and helps you sustain your business operations. However, here’s something you should consider. Is it a good idea to pay off your small business loan early? No doubt you can opt for the loan when your business really needs it. But repaying the loan early could have implications that you should be aware of. In other words, before you decide to opt for early repayment of your small business loan, you should give it some careful thought.
Questions to ask yourself before you pay-off your small business loan
Most personal loans and small business loans carry a high-interest rate. So it’s only natural for you to think that repaying the loan earlier can save you a significant amount of money on interest. But this may not always be the case. Sometimes, repaying your loan early can lead to a higher annual borrowing cost. So here are a few questions you should answer before you decide to pay off your small business loan early:
- Does early repayment save you interest? SBA loans are typically amortizing loans. These are designed in such a way that a majority of your initial monthly payments go towards interest. If you repay these loans early, you may save a good amount of money on interest. But this does not apply to small business loans, because these loans are not amortizing loans. This means that if you repay it early, you would still have to pay the entire amount along with the fees and interest.
- Do you have to pay a penalty? Most lenders charge a prepayment/early repayment penalty. This is usually a fixed percentage of your remaining loan balance. In some cases, despite this penalty, you may still be able to save a significant portion of interest. So do your math to determine whether it’s worth repaying your loan early.
- What will be the impact on your cash flow and taxes? You may wish to repay your loan early and soon be out of debt. But do you really have enough cash flow to manage an early repayment? This would largely depend on the other financial obligations of your business. Likewise, paying off your loan early can affect your taxes too. The interest in your small business loan is fully deductible. So if you repay early, you will be losing this deduction.
- Does early repayment improve your credit? You may be under the assumption that repaying your loan early will help you secure a new loan in the future. But in reality, it doesn’t always work that way. In fact, early loan repayment would mean that you’re losing your chance to build a good credit history. And financial institutions may see you as someone who was unable to pay for the life of the loan.
Therefore, early repayment of your loan is not necessarily good for your business. Instead, you can consider carrying out the terms of agreement fully with the lender. Remember, there are alternatives to paying-off your small business loan early. But if you decide to choose the early repayment option, ensure that you’re fully aware of the implications this is likely to have on your business.