For small business owners, SBA loans can be a real lifeline, allowing them to purchase real estate, repair critical machinery, refinance debt, or pay employee salaries. SBA loans come in several different types, some are short-term while others are paid off over 25 years, but each involves applying for the loan with the SBA and a lender.
Many borrowers wonder, “Can you pay off SBA loans early?” If business is booming and you have the money to pay it off, shouldn’t you?
Not necessarily. We’re going to explain why that is and the specific situations where it might be good to pay these loans off early.
When You Should Not Pay Off SBA Loans Early
SBA loan terms are usually quite favorable to business owners. They’re backed by the government, so lenders aren’t as worried about businesses defaulting and the government wants businesses to succeed as that grows the tax base. For most business owners, paying off an SBA loan early is not beneficial, for reasons listed below.
You Need a Tax Deduction
Interest on a loan is considered tax-deductible, which makes paying the loan off early a bad idea for most businesses. You’ll burn through your working capital quicker getting it paid off and will owe more at tax time. See your Tax advisor for additional details.
You Don’t Want To Pay a Penalty
You might assume that lenders want you to pay back your loan as soon as possible, but that’s actually not true –– lenders want you to pay interest (which is tax-deductible). Paying off a loan early eliminates those interest payments, and your lender still wants to make money off this transaction.
Therefore, some SBA loans are set up so that you owe a penalty percentage if you pay them off early. There are ways around this, with many lenders only charging the penalty if the loan is paid off in the first three years. It pays to read the fine print as you can save a lot of money in interest payments if you pay off the loan strategically.
You’re Trying To Build Up Your Business’s Credit
Your business’s credit score increases with each instance of on-time payment, which means if you pay it off early, you’re missing out on payment months. Having an open loan also improves your credit score, as it shows that other lenders have decided that extending credit to you is a safe bet.
Once these loans are closed, they won’t benefit your score as much. It’s counter-intuitive that your creditworthiness is penalized for fully paying off your debt, but that is the credit score system we have.
When You Should Pay Off SBA Loans Early
Every business is different, and in a minority of cases, paying off an SBA loan can be beneficial. It’s a decision that should be carefully considered though, as the terms are usually set to favor businesses that pay off the loan on the approved schedule. Here are a couple of cases where you might want to pay it off early though.
You Want To Eliminate Interest Charges
While you can save thousands, if not tens of thousands of dollars, on interest charges by paying back your loan early, it doesn’t really save money in the long run. Interest payments are tax-deductible, so those payments probably aren’t hurting your bottom line. Some businesses could benefit from eliminating their interest payments, but those circumstances are unique, especially since many SBA loans are structured so there is a significant penalty for early repayment.
You Want To Qualify for Another Loan
Assuming there is no prepayment penalty, paying off an SBA loan early is actually quite beneficial. By wiping away that debt, you’ll have a much easier time qualifying for a new loan. Your credit score might not be as good as it was with the outstanding loan, but lenders also don’t want to extend credit to someone who’s already in debt to someone else.
You Hate Being in Debt
Don’t we all? Many small business owners, particularly those who’ve used their own savings for initial capital, despise having outstanding loans when they don’t need to. For many, the peace of mind that comes with being debt-free is worth the financial costs that come with paying off the loan early.
Paying Off a Small Business Loan With LendThrive
If you’ve considered an SBA loan and are worried about whether you can pay off SBA loans early, LendThrive gives you options. Unlike SBA loans, LendThrive doesn’t charge prepayment penalties, making it one of the most flexible choices for small business owners.
LendThrive is a part of the AVANA Family of Companies and offers fixed rate business loans of up to $150K. Additionally, our Rate Reduction Rewards program lowers your interest rates after making consistent, on-time payments.