When getting a commercial loan one item you might forget to ask about are prepayment penalties. Forgetting to ask might be an expensive mistake if in the next five years you refinance or make a significant reduction in your loan balance.
Why do lenders charge prepayment penalties? Although it might seem like just a sneaky way to hit you with another fee, prepayment penalties serve an important function in commercial lending. When you get a commercial loan the lenders price their loans as if the loan will have a life of a certain numbers of years. The longer the life of the loan the more money the lender will make and the better deal they can offer you on your loan. If the loan is paid off early the loan might cost the lender money, especially if the lender charges very little in upfront fees.
For you a prepayment penalty can be a giant hit to your wallet if a future opportunity presents itself to refinance your loan with better terms or pay the loan off in full. Here is what you need to know about maybe getting the prepayment penalties requirement waived or lessened.
SBA loans – Prepayment Penalties Not Negotiable. SBA commercial real estate loan with terms over 10 years do mandate prepayment penalties. This penalty decreases each year and goes away after 5 years. In year 1 it’s 5% on the loan amount, in year 2 it’s 4%, and the following 3 years it’s 3%, 2%, and 1%. The lenders can allow large principal reductions without penalty and this could vary among lenders.
Bank Loans – Maybe negotiable. Among area banks the prepayment penalties can vary a lot. The highest prepayment penalties are the same as the above SBA declining scale and other banks might have a 2 or 3-year prepayment penalties. Depending on the bank this fee can be negotiable. From our experience a bank may be willing to reduce or waive this fee if your prepayment is due to your company doing great and wanting to eliminate this debt. If, however you want to refinance this debt with another lender the bank will still want to charge you a prepayment penalty. We have seen the prepayment penalties waived all together if your bank really wants to finance your loan and does not want to lose you to a competing bank.
Alternative Lenders – Prepayment Penalties Maybe Negotiable. Alternative lenders are a lot like banks regarding their prepayment penalties fees. From our experience alternative lenders tend to be more flexible than banks. This is because these lenders have higher upfront fees than what banks charge and they hit their break-even point sooner. Just like banks the stronger your loan the more leverage in general you have.
The above article was provided by The Best Business Loans in Town which is an online shopping tool that helps business owners find the best deals on business loans.