Repaying your business loan as early as possible certainly sounds appealing. However, it might not be the best decision.
If your business is in a situation that demands external funding, there’s a wide variety of options to choose from. From banks to Fintech lenders like Maxiron Capital, there are many places where you can go to get the funds you need.
Some business owners consider loans as nothing more than the necessary evil for business expansion. On the other hand, many see it as a large burden that can affect everyday operations.
If you’re among the latter, there’s a high chance that you’d want to repay the loan as soon as possible. At a first glance, this seems like a logical thing to do. If you’ve had a sudden influx of money, this is probably the first thing that you’ll consider doing to save on interest.
However, this might not be the best choice. There are many factors that you need to take into account to determine whether you should use your ready cash to pay off any loan ahead of schedule.
Many business owners aren’t aware of this, which can lead to some serious mistakes. To help you avoid them, let’s get into the good and bad sides of repaying your loan early.
Pros and Cons of Early Repayment
The decision for or against paying off a loan early will ultimately depend on your business goals. For many people, this makes a lot of sense. But there are others for whom this isn’t a good choice.
In any event, there are some universal benefits of repaying your loan early. Here are some of them:
Pro No.1 – No Interest
Interest charges are something that thrills a borrower the least. Just think about all the things that you could do with the extra money that you gave the bank.
This is the main reason why business owners would choose to repay their loan early. Taking that burden off your shoulders not only feels good, but it can perhaps open many doors. You can use the money saved to run new projects, invest in growth, or do anything else that will benefit your business.
This is especially true if you take out a long-term loan. In some cases, the interest over the life of the loan can be larger than the principal. This alone can suffocate your cash flow.
Pro No.2 – Positive Message to Stakeholders
Pretty much every person that can help your business grow will analyse its every detail. The amount of debt can affect the overall standing of your business, so it will be among the first things that stakeholders look at.
If they see that your business is drowning in debt, it will have no appeal to them. For this reason, repaying your loan early can paint a good picture of your company’s ability to juggle debt and growth.
The same goes for your future lenders. If a bank sees that you paid off your loan before it was due, there’s a much higher chance that it’ll give you another loan.
These are the major benefits of repaying your lender early. They’re often the first things that business owners think about when considering early repayment.
However, this is a double-edged sword. Let’s go over some of the drawbacks of this move.
Con No.1 – Opportunity Cost
Paying off your loan early can lead to a lot of missed chances. There are many things that you can do with the money and service the loan over time. If you know how to invest the sum properly, it can multiply and ensure that the debt isn’t a financial burden.
You also never know when the extra money might come in handy. Every loan has a repayment schedule that you can follow, which allows you to organise your finances accordingly. On the other hand, there are many unexpected situations that can rear their heads and require immediate action.
This is why it might be a good idea to hold on to the money and repay the debt over time. Use the money as a reserve or invest it for growth. Leveraging debt for growth is a common strategy of many successful businesses.
Con No.2 – Cash Flow Starvation
Every business owner knows how vital cash flow is to everyday operations. Cash flow issues can bring upon a minor inconvenience to a total collapse of your business.
For this reason, you might want to hold off on repaying your loan if it can jeopardise your cash flow. Sure, you’ll save on interest but you risk running out of money or not having a contingency.
Con No.3 – Added Expenses
Many business loans come with an early repayment fee. This might not be as burdensome as the interest, but it can still relieve your business of a significant amount of money. If you’re not comfortable with the early repayment fee, it’s best to let the loan run its course.
You also need to think about taxes. If there’s one good side to paying interest, it’s the fact that it’s tax deductible. If you decide to pay off your debt early, you can also expect to pay higher taxes, which can sometimes surpass the savings in interest depending on your tax bracket.
The important thing to do here is to calculate and compare the two. Only then will you be closer to making a final decision.
The Issues to Consider
It’s important that you don’t rush the decision about whether you should pay off your loan early. Take your time and examine your current situation carefully before you decide what to do with the extra money.
The first thing to consider is the interest charges that come with the loan. It might look like it’s worthwhile to pay off the loan early and save on the interest, but that’s not necessarily the case. If for some reason you need money in the future, charging to a corporate credit card or tapping into your overdraft facility can result in much higher interest rates.
The repayment schedule for your loan also matters. If you have a fixed repayment, you might end up paying a huge amount of money in interest as compared to paying more at the beginning of the loan. It can also take a long time to pay off the loan. This is when you should think about early repayment, as it may help you save a lot.
Another factor to have in mind is the amount of money that you can actually save. It’s important that you get all the facts and calculations right so that you can make an informed decision. Think about the penalty that you’ll have to pay, if there is one. Only go for the early repayment once you’re certain that your potential gains outweigh the fee and higher taxes.
As mention, you should never let you cash flow suffer as a result of early repayment. If you’re facing some liquidity issues, it might be better to put the money into your savings instead of paying off your debt. Remember, you can plan the debt repayment but you can’t predict when your business will need the money.
The Final Word
As you can see, there are many factors that determine whether you should repay your loan early. This might be a perfect solution for many businesses, while others might not benefit from it.
You’ll get a good idea if you consider all the above. Again, don’t let your distaste of debt and interest charges manipulate you into repaying ahead of schedule. Remember that leveraging debt is how you can grow your business.
Here at Max Funding, we believe that repaying your loan early deserves a reward. This means that you’ve taken everything under consideration to decide what’s best for your company. For this reason, we don’t ask for any fees if you decide to pay off your short-term or long-term loan early.
We also offer interest rates of as low as 1.80% for short-term loans, so the interest isn’t so high that you have to do something about it. We approve short-term loans up to $1,000,000 that you can repay over the course of up to 36 months. The application process is hassle-free and you can receive a pre-approval in less than 5 minutes.
All that’s left is for you to start the process. Apply Now to get started. Maxiron Capital does not charge early repayment fees.