Should You Pay Off Your Small Business Loan Early?

No one likes having to hang on to a debt for longer than necessary, so it only makes sense that you’ll want to pay off your business loan as quickly as possible.  But before you hurry off to your bank’s business banking section to start making extra payments, sit down and ask yourself if doing so is really such a good idea.

 

On Your Terms

Take a close look at the terms of your loan.  If you like them, have flexible payments and your interest rate is low, then you might want to think about paying the loan off like you’ve been doing and using any extra money that you might have on the growth of your business.  You could make repairs and improvements to the building or expand your business.  These are all great ways of increasing your business profit now so that you can revisit the idea of paying off your loan early later on when you have even more of a windfall.

On the opposite end of the spectrum, if you don’t like the terms of your loan, have a high interest rate and have high payments, then pay it off early if you can.

 

Profits

If you aren’t struggling to make payments every month and have a healthy profit margin with your business, then you might want to keep paying your loan off as you are now.  Business owners who are struggling when it comes to profits and making payments should start looking at ways that they can pay their loan off faster so that they can free up some funds.  If you are struggling, think about refinancing your loan.

 

Tax Time

Will paying off your loan early negatively impact your taxes?  If you’re in the 25% tax bracket and own a sole proprietorship, then you owe 25% of your business profits to the government for federal income taxes.  You also have to think about self-employment taxes.  By paying off your loan early, you might owe that combined percentage to the government since you’ll have more net profit.  Again, that extra money can go into the growth of your business rather than paying off your loan faster.  Just make sure you speak with a tax advisor before you do anything.

 

Paying Off Your Loan Early

If you have decided to pay off your business loan early, you’ll want to make sure that you do it right.  One thing that you can do is make bi-weekly payments instead of monthly payments.  This will reduce the amount of interest that you have to pay, give you an extra payment and could potentially shave off several months from the duration of your loan.

You could also round up your loan payments.  For example, if your payments are normally $2,264, you could instead pay $2,300.  This is an easy and fast way to take care of that business loan.  You can also sign up for automatic payments and electronic statements to see if that can knock a certain percentage off of your interest rate.

If you’re still undecided about paying off your business loan early, see if there are any banks in California that have business bankers who you can talk with.

 

Please feel free to contact Ella Gray at ella.l.gray@gmail.com with any questions.

This article is a guest post.  If you would like to write for Money Soldiers, you may visit the Write for Us menu for details.

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Comments

  1. In an environment of increasing interest rates, starting to reduce a business’s debt burden may certainly be something to consider. However, as you say, determining the benefit of doing so (especially with taxes to consider) is no easy task!
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