Prepayment and early payoff with brokered business loans

Whether paying early saves money depends on how the financing is priced. On a simple interest term loan, paying early saves the interest you have not yet been charged, minus any prepayment penalty. On most merchant cash advances, paying early saves nothing, because the total repayment is fixed. SBA 7(a) loans with maturities of 15 years or more carry a step-down penalty in the first three years. Ask about prepayment before you sign, not when you are ready to pay off.

The three pricing models

Pricing model	Common on	Paying early
Simple interest	Bank loans, SBA loans, many online term loans, lines of credit	Saves future interest, less any penalty
Fixed fee or precomputed interest	Some online term loans, some equipment deals	Saves little or nothing unless the contract gives a discount
Fixed repayment amount	Merchant cash advances, some revenue-based financing	Saves nothing unless the contract gives a discount

OnDeck's terms show how this varies even at one lender: if you pay off a term loan early, you may still need to pay a portion of the unpaid interest expense stated in the loan agreement. Ramp notes that on merchant cash advances the full repayment amount is fixed, so early repayment brings no interest savings.

Example 1: a simple interest term loan

You borrow $100,000 at 12% for 36 months.

Monthly payment: $3,321.43
Total interest if kept to term: $19,571.52

After 12 payments:

Interest paid so far: $10,415.62
Remaining balance: $70,558.44

Pay off the $70,558.44 now and you skip the remaining interest:

Interest saved: $19,571.52 minus $10,415.62 = $9,155.90

With a 3% prepayment penalty on the balance paid early:

Penalty: $70,558.44 × 3% = $2,116.75
Net savings: $9,155.90 minus $2,116.75 = $7,039.15

Paying early still wins here. The penalty trims the benefit; it does not erase it.

Example 2: a merchant cash advance

You take $100,000 at a 1.3 factor rate, repaid by fixed daily debits of $687.83 over 189 business days, about 9 months.

After 84 business days, about 4 months:

Paid so far: 84 × $687.83 = $57,777.78
Remaining: $130,000 minus $57,777.78 = $72,222.22

Early payoff option	Payoff amount	Total cost	APR on what you actually did
No discount	$72,222.22	$30,000	103.4%
$5,000 written discount	$67,222.22	$25,000	88.6%
$8,000 written discount	$64,222.22	$22,000	79.4%
Keep paying to term	$72,222.22 over 105 more days	$30,000	73.0%

Without a discount, paying early costs the same $30,000 and lifts your APR from 73.0% to 103.4%, because you paid the full price for 4 months of money instead of 9. The only reason to pay early without a discount is to free up daily cash flow or clear the position for better financing.

If an early payoff discount matters to you, ask your broker to get it written into the contract with exact dollar amounts by payoff date.

Example 3: SBA 7(a) loans

The SBA sets the rule. On loans with a maturity of 15 years or more, a prepayment fee applies when you voluntarily prepay 25% or more of the outstanding balance within the first three years after first disbursement:

When you prepay	Fee on the amount prepaid
Year 1	5%
Year 2	3%
Year 3	1%
Year 4 onward	None

Say you have a $1,000,000, 25-year SBA loan with about $1,000,000 outstanding:

Prepay $400,000 in year two: 40% of the balance, over the 25% line. Fee: $400,000 × 3% = $12,000.
Prepay $200,000 in year two: 20% of the balance, under the 25% line. Fee: $0.
Prepay the full balance in year four: Fee: $0.

Loans under 15 years do not carry this SBA fee. Timing a large paydown to stay under 25% a year, or waiting until year four, can save real money.

Equipment loans and leases

Equipment loans priced as simple interest behave like Example 1. True leases often work differently: early buyout typically means paying most or all remaining payments, sometimes with a small discount, plus the purchase option. Ask for the buyout schedule in writing.

Refinancing and renewals

Brokers often help clients refinance or renew. That is a good move when the new deal is genuinely cheaper, and it is worth checking the math, because the old loan's prepayment terms apply. Texas HB 700 requires providers to disclose the amounts used for prepayment charges and unpaid finance charges when a new financing pays off an existing balance. Ask for the same breakdown anywhere.

On an advance renewal, ask:

How much of the new advance goes to pay off the old one?
Is any unearned finance charge on the old advance forgiven?
What is the true cost and APR of the new money I actually receive?

Where prepayment terms must be disclosed

Virginia requires sales-based financing disclosures to list prepayment fees, provide an updated disclosure as of the payoff date, and describe prepayment policies.
Utah requires providers to disclose prepayment penalties, if any, on commercial financing of $1 million or less.
Texas requires the prepayment charges in a refinance to be disclosed, as above.

Partial prepayments and lines of credit

Not every early payment is a full payoff. On a simple interest term loan, an extra payment usually goes to principal and shortens the term or lowers the remaining interest, so check which one your lender does. On a line of credit, paying down the balance cuts interest immediately and frees the limit for the next draw; most lines carry no prepayment penalty, but some charge a fee to close the line early. On an advance, partial extra payments rarely change the total owed. Ask your broker to confirm how extra payments are applied before you send one.

Questions to ask before you sign

Is interest simple, precomputed, or a fixed repayment amount?
If I pay off in 6 or 12 months, what exactly do I owe?
Is there a prepayment penalty, and does it step down?
Is there a written early payoff discount on this advance?
On a renewal, is any unearned charge on the old balance forgiven?

A good broker answers all five before you sign, and puts the answers in writing. Search the register for term loan brokers or merchant cash advance brokers; verified entries show fees in writing.

Questions owners ask

Does paying a business loan off early save money?

On a simple interest loan, yes, because interest stops on the balance you repay. On most merchant cash advances, no, because the total repayment is fixed unless the contract offers a discount.

Do SBA loans have prepayment penalties?

Only on loans with maturities of 15 years or more, when you prepay 25% or more of the balance in the first three years: 5% in year one, 3% in year two and 1% in year three.

Where do I find the prepayment terms?

In the loan agreement and, in states like Virginia and Utah, in the provider's required disclosure.