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Many businesses will consider paying their loan off early to avoid paying extra in interest, but sometimes making prepayments will impact your cash flow needs. Other times, prepayment won’t get rid of the incurred interest on your loan and may actually make them worse. If you’re thinking of paying off your loan, make sure doing so makes sense for you and your business.
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When You Shouldn’t Pay Off Your Business Loan Early
It’s likely a bad idea to pay your business loans off early if you fall into one of three categories.
Payment Penalties: More Costly Than Interest
In Australia, many startups will compare business loans based on their interest rates, but few consider terms relating to paying them off. After all, you’re getting a loan because you didn’t have the capital to pay off a business expense in its entirety.
Now that you do, you may have realized that adding a prepayment, whether in bulk or periodically, incurs steep fees. These fees alone may prevent you from paying off your loan.
Missing Priorities: Did You Hit Your Financing Goals?
If your loan doesn’t have a prepayment penalty, consider why you needed the loan in the first place. Did you meet your financing goals ahead of schedule? If not, it makes more sense to keep on your payment schedule. The last thing you want is to be without additional cash flow.
Poor Cash Flow: Nothing Left for Other Investments
While paying off your loan early will almost guarantee that you save money, you also run the risk of being strapped for cash if an emergency happens. You also won’t have enough money to invest back into your company, like by hiring more employees or extending your business hours.
When You Should Pay Off Your Business Loan Early
It’s probably a great idea to pay off your loans early if you fall into the following categories.
Fast Growth: Money is Abundant and Constant
Paying off your loan may make a lot of sense, even when you consider all of the negative aspects of settling up early. If your business grows so quickly that you have enough capital to pay the loan off and its potential incurring fees without financial difficulty, then go for it!
Debt Stress: Removing Money Anxiety
However, if you just want to remove debt stress from your life, you may want to pay off your loan anyway. You’ll still save money in the end, and that might be all the reason you need.
Fluctuating Sales: Seasonal Businesses May Benefit
Businesses that have a fluctuating sales cycle also benefit from paying their loans off early. If you pay it off after your most lucrative sales period/season, then you can avoid carrying a loan payment during leaner months. Doing this will require enough cash flow to keep you afloat until your next busy season, so be sure to carefully analyze if you can afford this option.
When You Should Consider Refinancing Your Business Loan
Most business owners don’t have the option to make lump sum payments on their business loans, but they still want to pay their debts off earlier or lower their interest rate.
Businesses have the option to refinance their loans if their payment schedule is too long/narrow or the interest rate is too high. Many lenders will give trusted businesses a more manageable payment schedule or interest rate, provided they make their scheduled payment on time and in full. You may have to pay an additional fee, but this may be worth the investment.
Our financial situation can change at any moment, and lenders are aware of this. If you ask, they’ll be willing to work with you and draft a loan that better suits your needs.
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