Updated November 24, 2020
SBA Loan Calculator: Is Loan Prepayment a Good Idea?
A loan backed by the Small Business Administration (SBA) is likely a low-interest rate loan. The rates offered through an SBA-backed loan are usually the lowest in terms of annual percentage rates (APR) and loan duration. Put short, SBA loans generally offer the best terms for business owners.
However, if you are thinking of paying off a small business loan early, the SBA loan calculator can show you the best way to repay your loan. Maybe your interest rate has you contemplating making an extra payment or bumping up your monthly payments. Or you’re thinking about how much you could use that loan balance as some extra working capital.
You can use this easy SBA loan calculator from the Small Business Administration to check your loan payment amortization schedule, and compare how much you’d save on loan interest to how much cash you’d be losing from your reserves right now for an early payoff.
The SBA loan calculator is only one way to help you decide if making one last loan payment is right for your business. Take a look at a few common reasons it might be worthwhile to pay off your loan early.
Pay Off Your Small Business Loan Early If . . . You Have Multiple Business Loans
Say you’ve taken out multiple term loans for your business needs. From buying new equipment to getting working capital, you needed cash to cover business expenses. Now, you’re wondering if there’s a way to reduce the cost of your loan payments.
Business owners with more than one loan have three options for reducing loan payments:
- Paying off one loan early
- Consolidating multiple loans into one
- Refinancing multiple loans
Reduce Your Loan Payments By . . . Paying One Loan Off Early
Use the SBA loan calculator to look at each of your business loans. Add up the total cost of each loan. Will one loan cost you more than the others over the term of the loan? Paying off the loan that will cost you the most early can help save you money over the long term.
Your most expensive loan might be the one with the highest interest rate, or it could be one with the longest term. A higher interest rate over a shorter period of time, for example, might actually end up costing you less in total amount than a lower interest rate for a longer term.
Reduce Your Loan Payments By . . . Consolidating Multiple Business Loans
Unlike paying off your most expensive loan early, consolidating your multiple small business loans pays off all of your loans early. Instead of having two or three business loans, you’ll have one loan that covers the cost of your existing loans.
One thing to make sure when thinking about loan consolidation is that you’ll actually save money with the terms of the new loan by calculating the cost of the total loan.
Reduce Your Loan Payments By . . . Refinancing Multiple Business Loans
The last reason you might pay down a business loan early is to get the best deal when refinancing multiple loans. There are several reasons you might want to refinance your business loans, including getting a lower payment or interest rate. If you’re refinancing multiple business loans, paying off one loan early might give you better terms for refinancing. With less debt, your lender may be willing to give you a lower interest rate or a longer repayment schedule.
There are different ways to refinance business loans, including using the SBA 7(a) loan for refinancing. No matter how you decide to refinance, use an SBA loan calculator to make sure you’re saving money with your loan refinance.
Pay Off Your Small Business Loan Early If . . . You’re Planning to Expand and Need a New Business Loan
Business is booming and you’re ready to take the next step by opening a new location. You know you’ll need to take out a real estate loan for that new location. However, if you already have business debt from an existing loan, you may not get the best loan terms.
Paying off the remainder of your current business loan can lower your debt to income ratio and potentially increase your credit score. Your business debt to income ratio is how much debt your business has compared to how much income it brings in. Lenders prefer seeing that a business has little to no debt before offering a loan.
If you can pay off your existing loan before applying for a new loan for your expansion, you may be able to get better loan terms, including:
- Lower interest rates
- Unsecured loans (no collateral needed)
- Larger loan amounts
Pay Off Your Small Business Loan Early If . . . You Want to Invest in Your Business
When you secured your existing business loan, you may have needed the money badly to make ends meet — you just needed working capital to keep the business afloat. Now, however, your business has good cash flow and sales are increasing. It may be time to reinvest in your business.
Perhaps you want to show your employees you appreciate them with raises or improved benefits. According to a JPMorgan study, 80% of medium and small business owners plan to increase employee compensation in 2019. A new business loan or line of credit can help you make those changes.
At this point, you may be eligible for the SBA 7 loan program. You may qualify for a larger loan amount or lower loan rates now that your business has been established for a longer period of time with increased annual revenue. To pay for a larger loan, however, you might need to reduce your current debt. Paying off your remaining balance early frees up cash each month to make the payment for your new, larger small business loan.
The SBA business loan calculator allows you to check how much of your current loan you have left to repay. Before you take out the new loan, you’ll want to be sure you won’t wipe out your cash reserves by paying off the old loan. It may make sense to look at interim financing options for your business needs, such as lines of credit or business credit cards. You can use the calculator to check how a larger loan will affect your monthly cash flow, and also how much of a monthly payment you’d be able to afford.
Using the SBA Loan Calculator to Determine if Early Repayment is a Good Idea
Regardless of why you want to pay off your small business loan early, there are a couple of things to consider. You can use the SBA loan calculator to help you calculate business interest savings with an early payoff. You can then compare interest savings against:
- Loan prepayment fees
- Potential tax savings
Some small business loans have a penalty for early repayment. If your loan has a prepayment penalty, check how much an early payoff would cost. Compare the cost of fees you would pay against how much interest you’d save with an early payoff.
With each business loan payment, you pay a portion of interest for your loan. This interest payment is tax deductible. If you pay off your loan early, you lose this tax deduction. Talk to your tax advisor to see if paying your loan off early is worth losing the tax savings.