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PROS AND CONS OF EARLY CLOSURE OF A BUSINESS LOAN

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Posted on
Dec 03, 2017

PROS AND CONS OF EARLY CLOSURE OF A BUSINESS LOAN

Availing small business loans is a rule rather than an exception these days. With online finance partners such as Flexiloans, quick business loans are within every SME’s reach. These loans have varying tenure and flexible terms. Many SMEs opt for paying loans before the loan tenure when they have surplus cash flow. Early closure can be done either by making part payment before the payment of the sum is due or making the entire payment for the outstanding amount of the loan before the loan tenure. This is done to basically save on interest costs. However, pre-closure may not be the best option in every case.

Let’s understand the various pros and cons of early closure.

Pros

Interest saving

The tenure of small business loans entails interest costs. If the borrower decides and repays the outstanding loan amount before the tenure, then he or she saves a lot of money in the form of interest that would otherwise be payable to the lender. It is pertinent to mention here that the borrower should be mindful of the principal and interest portion repayment of a loan. If you have already paid off most of the interest portion, then it does not really make sense to foreclose.

Cons

Foreclosure charges

To understand the concept of foreclosure or prepayment penalty, one must appreciate that foreclosure leads to loss of interest for the lender which is his income from a loan given. To discourage borrower from foreclosing the loan, many lenders levy foreclosure charges and penalties that are very steep. These charges shave off the benefit of savings on interest charges in case of foreclosure. If you intend to foreclose the loan, make sure that you read the terms and conditions of quick business loans availed by you very closely. It also makes sense to negotiate with lenders to do away with foreclosure charges before you take the loan.

Cash flow crunch

If you foreclose your loan, you should be prepared to expect a slight cash flow crunch in the month when such payment is made. Do your math properly because the closure of one loan should not land you in another loan. Only if you think that such closure will not cause a severe shortage of funds to run the business, should you opt for pre-closure of the loan.

These were important pros and cons to know about loans availed for business operations. Suitability of foreclosure depends on the situation, terms, and conditions and therefore, need to be evaluated from case to case.