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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.
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
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