How to negotiate prepayment and early payoff terms

Prepayment terms are negotiable on most brokered loans, but only before you sign. On a conventional term or equipment loan, ask for no penalty, or a short step-down penalty with carve-outs for a sale or refinance. On a merchant cash advance, ask for a written early payoff schedule in dollars. On SBA loans, the program sets the rules, so your job is to know them and make sure nothing extra has been added.

Your broker is the right person to raise this. Lenders expect brokers to ask, and a broker who negotiates prepayment terms is protecting your next deal as well as this one.

Why this is worth an email

Plans change. You sell the business, a bank offers you a cheaper refinance, or a strong season lets you clear debt early. If the contract says a payoff costs you 3% of the balance for the life of the loan, or the full remaining factor on an advance, that flexibility is gone. The time to buy it back is when the lender is competing for your file.

Our guide to prepayment and early payoff with brokered loans explains how each pricing model treats early payment. This guide is about changing the terms.

Term and equipment loans: four asks in order

Ask for these in order. Stop when you get a good answer.

1. No prepayment penalty. Many online and bank lenders will agree on strong files, especially if another offer has none.
2. A step-down penalty that ends early. For example 3% in year one, 2% in year two, 1% in year three, then nothing.
3. A free annual paydown. The right to prepay a set share of the balance each year, such as 20%, with no fee.
4. Carve-outs. No penalty if you prepay from the sale of the business, from insurance proceeds after a loss, or by refinancing with the same lender.

Worked example. A $250,000 equipment loan at 9.5% over 60 months has a payment of $5,250.47. The lender's draft says 3% of the outstanding balance for the life of the loan. Your broker counters with a 3%, 2%, 1% step-down.

At month 30 the step-down saves $2,794.33. If you never prepay, it costs you nothing. That asymmetry is why lenders often agree.

Clause language to request: "Borrower may prepay all or part of the loan at any time. A prepayment fee of 3% applies in the first 12 months, 2% in months 13 to 24, 1% in months 25 to 36, and no fee thereafter. No fee applies to prepayment from the proceeds of a sale of the business or of the financed equipment, or from casualty insurance proceeds."

SBA 7(a) loans: know the rule, check for extras

The SBA sets the 7(a) prepayment fee. It applies only to loans with maturities of 15 years or longer, when you voluntarily prepay 25% or more of the outstanding balance: 5% of the prepaid amount in year one, 3% in year two and 1% in year three. Loans under 15 years carry no SBA prepayment fee.

You cannot negotiate the SBA fee away, but you can plan around the 25% line, and you can check the note. Starfield and Smith, an SBA law firm, lists lender prepayment penalties among the charges SBA lenders may not impose. If a 7(a) note shows a prepayment fee beyond the SBA schedule, ask your broker to have it removed before closing.

SBA 504 loans: the debenture penalty is fixed, the bank piece is not

A 504 project has two loans: a first lien loan from a bank and a debenture through a certified development company. Pursuit Lending explains that every 504 debenture carries a prepayment penalty. On 20 or 25 year debentures it declines over 10 years: the year one penalty equals the debenture rate applied to the remaining principal, it drops by a tenth of that each year, and it is gone by year 11. On 10 year debentures it falls by a fifth each year and ends by year 6. Partial prepayment of the debenture is not allowed.

The bank's first lien loan has its own terms, set by that lender. That piece is negotiable like any conventional loan. If you might sell the property within five years, ask your broker to push for a short step-down on the bank loan, and ask whether a buyer could assume the 504 loan, which Pursuit Lending notes may let you avoid the penalty.

Merchant cash advances: get the discount in dollars

On most advances the total repayment is fixed, so paying early saves nothing unless the contract says otherwise. Swish Funding puts typical early payoff discounts at 2% to 10%, structured either as a sliding scale by time remaining or as a flat percentage, and notes some funders offer little or none.

A verbal promise of "a good discount if you pay early" is worth nothing. Ask for a dated schedule.

Worked example. A $60,000 advance at a 1.35 factor rate repays $81,000. Your broker asks the funder to write in this schedule:

Each line sits inside the range Swish describes. If the funder refuses a schedule, ask for a single flat discount, such as 5% of the remaining balance at any time. If it refuses both, factor that into your comparison with other offers.

In Virginia, sales-based financing providers must describe their prepayment policies, including whether you receive a discount to the finance charge, so you can check the disclosure against what you were promised. Anywhere else, ask your broker for the same answer in writing.

Lines of credit

Most lines carry no fee for paying down the balance. Watch instead for fees to close the line early or for minimum usage. Ask: "Is there any fee to close this line before the renewal date, and is there an unused line fee or minimum draw?"

Scripts for your broker

• "Before we accept, can you ask the lender to remove the prepayment fee, or limit it to 3, 2, 1 over three years?"
• "We may sell the business in two to three years. Can the note exclude prepayment from sale proceeds?"
• "Please get the early payoff discount on this advance written into the contract as dollar amounts by date."
• "Can you confirm the 7(a) note carries only the SBA prepayment fee and nothing from the lender?"

Trade, do not just ask

Prepayment terms protect the lender's expected return. Offer something that protects it another way: a slightly higher rate, a longer minimum period before refinancing elsewhere, or autopay. When you plan to pay early, a better prepayment clause is often worth more than a quarter point off the rate.

Search the register for merchant cash advance brokers or SBA loan brokers. Verified entries show fees in writing, and every entry carries a register number and last checked date.