Taking out a loan can be a pivotal moment for any business, opening doors to growth, stability, and new opportunities. But as you move from the excitement of receiving funding to the routine of making payments, you may start wondering if early loan payoff is the right move for your business. This decision isn’t one-size-fits-all—it depends on your cash flow, financial priorities, and long-term goals.
The Excitement and Complexity of a Loan
The beginning of a loan can be exciting, anxiety-inducing, and involve a whole host of other emotions. When used most effectively, new capital can kick your business off to a roaring start, expand your capacity to take on projects that you and your clientele are most excited about, or solidify the stability of your operations for the foreseeable future.
Should I Pay My Loan Off Early?
After a few months to a year of payments, many of our clients begin to ask themselves: should I pay this loan off early? If I think I should, when should I do it? And how?
Taking on additional capital for your business first and foremost should be to enhance the cashflow of your business (in the many ways that can happen). Similarly, deciding whether or when to pay your loan off early should be evaluated under a similar framework.
Factors to Consider for Early Loan Payoff
Below are some of the things to think about when deciding whether an early loan payoff is the right thing to do for you and your business:
Are there any early payoff or prepayment penalties?
While Business Impact NW does not impose any fees or penalties for early loan payoff, many less scrupulous lenders may do so. If there are penalties or fees, it will be noted in the documentation that was signed at the beginning of the loan. Some may charge a relatively nominal fee, while others charge the equivalent of the interest they would have earned if the loan had been paid over the full term. These amounts can vary widely, so knowing at the beginning can impact your decisions later on.
What is the seasonality of my business cashflow? Do I depend on the busy times to carry me though slower ones?
Every business has seasonality to its cashflow, although some seasonality is more pronounced than others. A fireworks stand will make all of its money during a one- to two-month period, while a coffee shop will sell coffee year-round.
Similarly, expenses may also fluctuate throughout the year. A brick-and-mortar café will always have some expenses throughout the year, whether it is utilities, staffing, inventory, rent, or otherwise. If it is located next to a major college or university, the shop may depend on the busier months, when school is in session, to carry it through the slower summer months. Conversely, a rafting guide company may have very few expenses during the winter, beyond storage of equipment, that may make it easier to project how much cash is needed to carry them to the next season. Knowing the particulars of your business will allow you to project what additional cash you may have on hand to apply towards things like an early loan payoff.
Is an early loan payoff the best use of my business’s capital?
While regular monthly payments can be a mental drain, lending capital is first and foremost intended to grow, start, or stabilize your business. It is up to you, the business owner, to decide whether it is more meaningful for the continued operation of your business. You can offload your debt or use the “wiggle room” you are now afforded, to continue enhancing the profit centers of your business. This can be done by expanding the availability of a popular product or service, acquiring a new piece of equipment to enhance your efficiency, or through other means.
Ways to Pay Off a Loan Early
There are several different ways to go about paying a loan off early. Among them:
Large Individual, One-Off Paydowns
These are most common for businesses who save, in particular, for early loan payoff or whose cashflows include large payments. While large payments are most common for construction or other project-based businesses, those whose cashflow depends on payments from large organizations like insurance companies or government may also experience large influxes of cash on a periodic basis.
Additional Payments on a Regular (Monthly, Quarterly) Basis
While most commercial loans are structured around monthly or bi-monthly payments, it is possible to make additional payments in addition of the original schedule. Some lenders may be able to incorporate these additional regular payments in their standard payment processes, while some others may prefer that you send a separate check.
Larger Than Scheduled Regular Payments
Most loans will have a set amount that is pulled regularly (typically monthly or bi-monthly). If your business is doing better than expected, you may be able to speak with your lender about increasing the amount of those regular payments so that the principal balance of the loan gets paid down faster.
If you have enough cash on hand to pay off the loan entirely before its scheduled maturity date, contact your lender for a payoff quote with the anticipated payoff date. There may be some end-of-loan fees outside of prepayment penalties that you need to be aware of when calculating how much it will be to pay the loan off in its entirety.
Deciding whether to pay off your business loan early is a significant choice that depends on your unique circumstances, cashflow patterns, and business goals. By carefully evaluating potential prepayment penalties, understanding the seasonality of your revenue, and considering alternative ways to use your capital, you can make a decision that supports your business’ long-term success. If early payoff aligns with your priorities, explore the different strategies to manage it effectively. Remember, the right approach is the one that best positions your business for stability and growth.
Thinking About Your Next Move?
Whether you’re considering paying off your loan early or exploring new ways to maximize your capital, Business Impact NW is here to help. Visit our About Our Loans page for details on our lending options or schedule a consultation with our lending team to discuss what’s best for your business.
Not quite sure what’s right for you? Explore our free resources to support your decision-making. Our Capital Readiness Program offers free classes on financial management and credit, and our loan preparation coaches provide personalized guidance to help you navigate your financial journey.
