How to Save Money with Prepayment Discounts

If your business is about to take out a business loan, you will now have the working capital you need to help grow your business. it is important to be up-to-date on the lender’s available options. Loan prepayments discounts can be helpful for small business that are seeking short-term working capital.

An example of a prepayment discount is if you took out a loan with a 10-month term, the lender would reward you by giving you a discount if you pay it back in 9 months or less. Today we will explain how prepayment discounts work and if it is a good fit for you.

Things You Need to Know About Early Payment Discounts

Consider Your Needs and Timeline

The first thing you should do is figure out if you need short-term or long-term financing. This will affect whether or not prepayment discounts will be right for your business.

Small business owners who need short-term working capital that also receive large deposits into their bank account will be more likely to have the money to pay off the loan fast. Their short-term financing needs may vary, but can range from emergency one-time costs, additional cash flow needed to finish a big project, or funds for new equipment that will ultimately increase revenue.

Your Business’s Industry Matters

Some industries are more likely to benefit from prepayment options than others because of how much they receive revenue.

A construction company does not get paid daily, they get paid in large amounts. Because of this reason, they can take out a loan in order to have funds to finish a project and they can pay back the loan once they get the funds.

Another industry that could be a good fit for prepayment discounts is retail stores during the holiday season. They can buy large amounts of inventory, sell it fast, and then pay their balance after the holidays.

Another good fit for prepay discounts are manufacturers. They work off net terms so there are many times they have to wait between 30 and 90 days upon order completion to get paid.

By taking out a loan, they are able to get funding that they can use during these months to complete more jobs. This way, they do not have to turn away customers and they can pay their balance off once they are compensated by utilizing prepayment discounts.

Beware of Penalty

Make sure that the lender you are working with will charge you a prepayment penalty fee or not. Some lenders will charge you fees if you pay back your loan balance ahead of schedule. In many cases, business owners cannot afford the fees, so double check before you take out a loan.

The Bottom Line

When you take out a small business loan, it is important to educate yourself and do research first. Make sure that the amount and loan term is a good fit for your business, so that the additional working capital helps your business and doesn’t hurt it.

If your working capital needs and industry coincide with what was mentioned, consider looking into prepayment discounts.