When questioning how quickly you should pay off your business loan, the correct answer is typically “right-away.”
However, depending on the terms of your loan, adding more than what’s allowed could subject you to fees that may be more expensive than what you’d incur from interest. Let’s take a look at a few factors that may prevent you from paying off your loan early.
When You Should Prepay Your Business Loan
Many small business loans in Australia will allow you to make multiple prepayments throughout its term, and it would be wise to do so.
For example, if you’re a business that takes on an infrequent number of clients or an established corporation with a fluctuating sales cycle, like restaurants, paying off your loan early is better because you can compensate for slower months.
You might also consider paying off your loan sooner rather than later when you scale faster than you anticipated. Since most small business loans come with high interest rates, it’s beneficial for your company to pay off these loans as soon as possible to make room for better offers.
However, you may want to avoid paying your loan off early if your lender still expects you to pay your expected interest rates at the end of the term. Many lenders will void this interest if you ask, so speak to your bank or private issuer beforehand to see if that’s possible.
When You Shouldn’t Prepay Your Business Loan
The reason why you sought financing in the first place is that you didn’t have enough cash flow to help you with your business. For this reason, you may want to keep your loan around just in case you fall on hard times.
However, if you feel you’ve reached the goal your loan was supposed to fulfill, you may decide it’s worth it to pay off your remaining balance.
One of the reasons why businesses won’t pay off their loan early is because there are prepayment penalties in place that include missing interest and then some. Still, if the interest on your loan is front-loaded, you’ve likely already paid the bulk of those penalties.
Another viable reason for sticking to a payment schedule is the need for consistent cash flow. For example, if you pay off your loan all at once, you won’t be able to use a constant amount of funds to open a new location, hire more employees, or extend your business hours.
How to Pay Off Your Business Loan Faster
If you’ve decided that your best course of action is to pay off your loan sooner, you should first try to speak with your lender about the possibility of refinancing.
Although putting down a lump sum payment every month will pay off your debt faster, this isn’t possible for most startups.
When you speak to your lender about refinancing, ask the following questions:
- Can I round up my monthly payments?: Rounding up your monthly payments to the nearest $50 can shave 5-10 extra months off of your loan term.
- Can I make extra payments each year/month?: Having the option to make extra payments is better than not having it at all. If in a few months, your business has enough cash flow to make a lump sum payment, you can do so at your leisure.
- Can I opt for bi-weekly payments?: With bi-weekly payments, you can shorten your loan by several years or months, depending on its length.
Refinancing for a better loan term is ideal, but if your lender won’t give you what you’re looking for, it’s better to just stick with your payment schedule. However, you can use this information the next time you’re looking for a more flexible loan that allows you to make several prepayments.