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You have a small business loan with a high interest rate. Your firm does better than expected and you have the money to pay it off early. While an early-payoff may seem like a no-brainer at first glance, there may actually be some good reasons NOT to finish off that loan as soon as possible.

Increased APR
Unlike most car loans and mortgages, many small business loans do not fully amortize. With an amortizing loan, the principal and interest are both spread out over the term of the loan, with the majority of early payments going toward interest. This allows lenders to make sure they get their profit at the beginning of the loan. Many business loans, however, use a fixed-fee structure where a certain dollar amount of interest is due each year regardless of when the loan is repaid. That means paying off your loan could dramatically increase your total annual percentage rate (APR). In this case an early pay off will not save you in interest charges.

Reduced Tax Benefits
Small business loans offer tax benefits to borrowers. All interest paid on small business loans is tax deductible, so repaying it too quickly may actually hurt your company when tax time rolls around.

Prepayment Penalties
Some loans have prepayment penalties, a fee that must be paid if the loan is paid off early by a significant amount of time. Often this fee is charged as a percentage of the remaining loan balance. For example, if your loan has a $15,000 balance, a prepayment penalty of 1% or $150 would be assessed. Sometimes the fee is worth paying to get rid of a high interest rate loan, but it will depend on the size of the prepayment penalty.

Reduced Cash Flow
Repaying a small business loan early may be a bad idea if to do so, you must scrape together the cash and leave your business on thin reserves for a while. Making sure you have adequate working capital is much more important the paying off that loan ahead of schedule to save some interest charges.

While getting rid of high interest small business loans early can sometimes benefit your company, be sure to check all the terms of your loan before sending off that final check.


Search for Small Business Loan Sources and receive your matched lender list
AND received FOUR free Business eBooks worth $39.95!
Search for Small Business Loan Sources