Know the Risks of Paying Off a Business Loan
Many businesses know what it’s like to take out a short-term loan. These types of loans have relatively short terms, typically anywhere from a couple months to over a year and are repaid daily or weekly. The frequency of repayment means that the interest rates are accelerated, so you may be paying a lot more in interest than you think.
But is it ever a good idea to pay it all back before the term is up? Learn more about the benefits and drawbacks to paying off that short-term loan early.
Why the Need to Pay Back a Loan Early?
Business owners may feel the need to pay back a short-term loan early because they need more money and are typically looking to secure higher loans. Some lenders may offer you a higher loan that seem like a better deal, but may offer to buy out the original loan first. This is to minimize the lender’s risk in case your business runs into trouble, so they do not have to compete with the original lender when lining up for payment.
A Word of Caution
The second lender will use a part of the money you are borrowing to pay back the money you owe to the original lender. But the interest you owe will not be forgiven, and since you are shortening the timeline, your interest case could increase to an accelerated rate. The risks and costs may be greater than the reward of immediate cash for your business.
What Should You Keep in Mind?
The most important thing is to understand the math behind what you owe – know your margins – before agreeing to a loan. Take into consideration your expenses, any fees, the interest, and make sure that the capital is working towards the growth of your business.
One tip to keep in mind is that, depending on the lender, you may be able to negotiate for incentives or discounts if you are contemplating paying off a loan early. Try opting for a weekly payment plan rather than daily to decrease the interest.
Bottom Line – Should I Pay Off That Short-Term Loan Early?
It depends – if your business is currently growing and you are not in need of additional cash through a loan, then it can do more good than harm to your business. This means that if your business is doing well and you have the cash flow on hand from a customer payment, then you most likely can afford to do so.