If you are looking to pay off your business loan early, then you will have to consider a number of consequences. From taxes to cash flow, paying off your business loan can affect your business in unexpected ways. Here’s what you should expect when you pay down that loan.
Tax Bracket
As you probably already know, the interest in your small business loan is tax-deductible. What you should also know is that paying off your small business loan early can also move you into a different tax bracket. In some cases, you can find yourself paying higher taxes by paying off your business loan early. It is highly recommended that you consult your tax accountant before paying off your loan.
Comparing Loan Types
Before you pay off your business loan, you should compare the different types of business loans available. For instance, you can get a fixed-rate business loan. This is highly recommended if you can secure a low-interest rate. If you are trying to get a loan in a high rate environment, then consider an amortized loan. If you don’t want to deal with payment deadlines, then consider a line of credit. There is usually no fixed payment term for a line of credit. A line of credit is an excellent option if you don’t have a dependable cash flow to your business.
Securing New Loans
One of the best reasons to pay off a business loan early is to help you secure a new loan. By paying off a business loan early, you are demonstrating to the lender that you are a low-risk customer. However, there may be some early repayment penalties coming your way. It is a good idea to talk to your business advisor before paying off your loan early. Also, talk to your lender to see if paying off your loan early can allow you to borrow more in the future.
There are a number of compelling reasons to pay off your business loan early. If you are looking to grow your business and get new inventory and equipment, paying off that loan fast is a great option. However, if you cash flow issues or you are worried about your tax bracket, you should simply make your scheduled payment. Consult with your tax professional to see which business loan payment option is best for you.
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