One of the main benefits of business loans is that they allow companies to spread large costs across several smaller payments. Most lenders give businesses a choice of how many months or years they wish to repay a loan over, with a longer term usually translating to lower monthly payments. By avoiding large one-off costs, a business can look after its cash flow while continuing to grow.
That being said, if the financial position of your company changes during the term of a loan, you may wish to pay it off early. Not all lenders give businesses the option to repay early, and those that do will sometimes charge a fee, so it’s worth checking this before agreeing to the loan.
Early repayment – key considerations
Clearing your debt early may improve your chances of securing additional finance in the future, possibly at a lower interest rate. Some lenders, including Fleximize, will even reward companies for repaying early, recalculating the interest so that they only pay for the time they had the loan.
However, many lenders won’t go into detail on their websites or promotional material. For example, a lender might say it offers penalty-free early repayments, but it also won’t recalculate the interest or apply a discount to the total amount repayable, meaning there’s no real value in repaying early.
An FAQs page may provide some additional detail, but the small print in a lender’s loan agreements should include a clause that outlines its early repayment policy in full. Alternatively, you could ask the lender to confirm its policy in an email or over the phone.
How to settle a loan early
In the majority of cases, you will need to request an early settlement quote from your lender before paying off the loan in full. This will usually include the following:
- The outstanding balance of your loan
- The early settlement figure due
- Early repayment charges payable (if any)
- The ‘settlement date’ – when the settlement payment is due
This quote will usually be valid for a limited period of time, as specified by your lender, giving you a chance to consider whether you still want to proceed with the early repayment.
How to avoid an early repayment charge
If you’re tied into a loan with a lender that charges for early repayment, the only way to avoid a charge is to pay off the loan according to the agreed schedule. However, if you’re yet to apply for funding and want a flexible arrangement, make sure you look for lenders that offer penalty-free early repayments and will reduce the interest owed if you decide to settle early.
Overpayments are another option
An alternative to repaying your loan in full is to pay off a chunk of it with a lump sum. This can be ideal for companies that have extra cash available but aren’t in a position to settle the total amount early. Some lenders allow businesses to make overpayments free of charge and will recalculate your balance so that all subsequent repayments are lower.