If you're in the process of paying a business loan off, you may be wondering if paying the debt back early is going to be to your advantage.
There are a variety of different factors you need to consider before paying off a business loan early. Below are four things you need to think about to determine if it's in your best interests to pay your loan off early rather than follow the pre-established repayment schedule:
1. How much cash flow you would have available after paying the loan off?
Cash flow is important to keep any business running. You need to not only have adequate cash flow to finance everyday operations, but you need to also have an emergency fund in case surprise expenses come up.
Stick to your repayment schedule and avoid an early payoff to be safe if you don't have more than adequate cash flow available to pay your loan early and then have money left over.
2. What the interest rate is on the loan and how it compares to interest from making other investments?
When it comes to evaluating different debts that your business has, interest rates are a more important consideration than the overall amount of the individual debts.
If you've benefited from a particularly low interest rate on your loan, you should probably avoid paying it off early. You can use the available cash you might have paid the loan off with to make other investments that will help you to bring in more profits as you continue making payments on your original loan.
3. What effect paying off a business loan early will have on your tax return?
Typically, you can deduct loan interest from a small business loan on your company tax return. If you pay off your loan early, you may not benefit from as significant a deduction.
Calculate your future tax liability and how paying off the loan will affect your tax burden at the end of the year. Avoid early repayment if paying off early will significantly increase your tax liability.
4. Whether or not you'll have to pay a fee for paying off the loan early?
Some lenders require small business borrowers to pay a fee if they pay off the loan early because they'll be collecting less in interest.
You probably won't want to pay your loan off early if you'll be subject to a fee if you do. However, if the fee is less than the amount of interest you'd have to pay by waiting to repay, it might be worthwhile to go ahead and pay the loan off early anyway. For more information, contact an attorney like James Alan Poe, P.A.