Some people see a business loan as just another cost of doing business, while others see them as an unwanted drain on their budgets and want to get rid of them as soon as possible. If you have a windfall of cash you can use it to re-invest in your company or pay down debt. Sometimes the choice is hard to make. Whether you want to pay off your loan early depends on what kind of loan you have, how burdensome the interest rate, early re-payment penalty fees and other factors.
Pros of Paying Your Business Loan Early:
Freedom from Debt
There can be a light, liberating feeling that accompanies paying off a loan early, especially if you have been paying it off for years. Not having debt can make you feel confident that your business can handle temporary slowness in sales, because there is less financial obligation. In addition, you might feel less desperate in terms of performance, and this may allow you to come up with new ideas for your business. Not having that debt obligation month after month can open a world of possibilities.
No more Interest
Interest is a dreaded word for a borrower of a business loan, unless it refers to the interest customers have for your product. For long-term loans, interest can sometimes amount to more than the principal and represent a substantial drain on finances.
It Will Make Your Business More Attractive
When investor analyze the financials of a company, one major consideration is the amount of debt. For publicly traded companies, it may mean the difference between people buying stock in the company or giving it a miss. Less debt is a sign of financial health. Also, if you pay off your business loan, your company will look more attractive to lenders if you show you can pay off debt.
Cons of Paying Your Business Loan Early:
Early Repayment Fees
While early repayment fees might not to amount to as much as interest, they may be worth considering if you have a low interest business loan. Do the math and see if paying this fee makes sense for your business.
You May Need the Money
Any company needs some extra money in the bank for unforeseen expenses. Securing a loan can require a good deal of work and waiting, and it might be best to keep that money in the bank rather than using it to pay off a debt. Once a loan is paid off, you can‘t get the money back, so it might be worth holding on to it.