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Repaying a business loan: early and penalty-free?

Entrepreneurs borrow money from a lender. Of course, the loan amount must be repaid. Usually an equal part of the loan is repaid every month. This amount plus the interest must be paid every month. This is often done via direct debit. northeasternwholesale.com for a critique

How does paying off a business loan work?

How does paying off a business loan work?

Business loans are repaid on a straight-line basis. When taking out business loans, you can opt for a fixed interest rate or a variable interest rate. With fixed-rate loans, the entrepreneur knows exactly what amount he has to repay monthly. In the case of floating rate loans, the interest, and therefore also the monthly repayable amount, may vary.

When applying, the lender assesses whether the entrepreneur is able to repay the business loan and the interest within the agreed term. This prevents problems with the refund.

Early repayment of a business loan

Early repayment of a business loan

Those who take out a business loan sometimes have more financial space than expected. It is then a good idea to repay the business loan earlier. The borrowing party has then already finished paying off the business loan. Entrepreneurs would do well to read the terms of their business loans carefully. Often only a limited part of a business loan can be repaid without penalty. The monthly amount will be reduced by repayment early without penalty.

Paying off a business loan: an example

Paying off a business loan: an example

For example, a sole proprietorship borrows $ 10,000 at an interest rate of 5.6%. The table shows what the company must pay if it repays $ 200, $ 150 or $ 100 per month.

Monthly amount Duration in months Total payment
$ 200 58 months $ 11,377
$ 150 81 months $ 11,954
$ 100 136 months $ 13,405

The monthly amount is repayment + the interest to be paid. For a monthly amount of $ 200, the sole proprietorship in this example pays $ 46.67 in interest for the first month. It therefore repays an amount of ($ 200 – $ 46.67 = $ 133.33) in the first month on the business loan of $ 10,000.