Dissecting a “No Prepayment Penalty” Clause
This entry is part of a larger educational blog series that is presented by Carl Fairbank, Founder and CEO of Breakout Capital. Carl founded Breakout Capital on three fundamental pillars: Suitability, Affordability, and Transparency. Breakout Capital introduced a revolutionary suite of straightforward funding solutions that eliminates the hidden costs featured in too many of the other short-term small business financing products available in the market. This series is intended to dispel several of the long-standing myths that, over time, have unfortunately come to be accepted as fact.
Myth 3: If a lender or a cash advance company states that there is “no prepayment penalty” that means I can pay off my loan or advance at any time by just repaying the remaining principal or funded amount.
Unfortunately, this is not the case despite many brokers and funding providers marketing “No Prepayment Penalty!” as a benefit to their program. “No Prepayment Penalty” simply means you will not get charged fees in addition to a contractual amount if you pay early. “No Prepayment Penalty” can be a significant benefit with long term, lower rate lenders such as Fundation that allow customers to repay outstanding principal at any time without incurring additional fees; in other words, all remaining interest following the date of the pay-off is waived. This can be a great benefit to borrowers prepaying a three-to- five-year contract; paying early can save a significant amount in interest payments.
However, in the short-term working capital market, most loans and all advances are structured with a “fixed contract”; as an example, a fixed contract loan means that if you borrow $10,000 with a payback of $12,500, you will owe the funder $12,500 regardless of when you pay it back. Consequently, on fundings with a fixed contractual amount due, the funders are correctly stating that there is no prepayment penalty; however, you need to payback the full amount of the contract (in the above example, $12,500), not just the remaining principal. This amount would include any unpaid interest or fees.
We view marketing “No Prepayment Penalty!” on fixed contract loans or advances as highly deceptive and unethical. If you are considering short-term funding, you need to ask your current or potential funding provider if they offer an early repayment benefit or prepayment discount. On fixed contracts, an early repayment benefit or early repayment discount allows you to pay less than the contractual amount if you decide to repay the loan or advance early. If they won’t offer an early repayment discount or benefit, you are likely working with a funding provider that will also require you to Double Dip to access additional capital.
Breakout Capital is committed to responsible funding. We believe it is better for you to keep your business and grow it responsibly than set it up to fail with insurmountable debt. Please contact us today if you’d like to partner with us.