Paying off a business loan or finance agreement early—also known as early settlement—can help your business save money, free up cash flow, and reduce debt. But it’s not always straightforward. Fees, interest calculations, and the type of finance you have can affect whether settling early is worth it. This guide will break down everything you need to know about early settlements and how to make the right decision for your business.
What Is an Early Settlement?
An early settlement happens when you pay off a loan or finance agreement before its scheduled end date. For example, if you took out a five-year business loan but want to pay it off after three years, that is considered an early settlement.
Businesses often choose early settlement to reduce debt, save on interest, or gain financial freedom. However, not all agreements allow early settlement without charges. Some lenders may include early repayment fees, while others may adjust the interest you save. Always check your contract or ask your business finance broker for a clear settlement figure.
Why Settle Early?
There are several reasons to consider settling early:
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Save on interest: Paying off a loan sooner can reduce the total interest you pay.
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Free up cash flow: With fewer monthly payments, you can allocate money to growth, new equipment, or unexpected expenses.
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Reduce debt: Lowering debt can improve your financial position and make applying for new finance easier.
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Peace of mind: Many business owners simply like knowing they no longer owe money.
However, early settlement isn’t always the best option if fees outweigh savings, or if it strains your cash reserves.
How Early Settlements Work
The process depends on the type of finance you have. Generally:
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Contact your lender or broker to request a settlement figure. This includes your remaining balance plus any applicable fees.
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Compare the settlement figure with the total remaining repayments. This will help you calculate potential savings.
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Decide if settling early is financially beneficial.
Some lenders offer discounts for early repayment, while others may charge early repayment charges (ERCs) or exit fees. Understanding the terms is critical.
Finance Products That Can Be Settled Early
Many types of business finance allow early settlement, though the rules differ:
Business Loans
Most business loans can be settled early. Paying off a loan sooner can reduce interest costs. Check if your lender offers a discount for early repayment or charges a fee.
Asset Finance (Hire Purchase & Equipment Loans)
With asset finance, such as hire purchase agreements, early settlement is usually possible. Paying off equipment or machinery loans early may save interest, but some agreements include minimum interest charges.
Lease Agreements
Leases—whether finance leases or operating leases—may be settled early. Since leases cover usage rather than ownership, early settlement might still require payment of remaining rentals. Negotiating with your funder is key.
Invoice Finance
If your business uses invoice finance, like factoring or invoice discounting, early exit is possible. Be aware that settlement fees may apply depending on the contract.
VAT and Corporation Tax Loans
Short-term loans such as VAT loans or corporation tax loans can often be settled early. This can save interest if your business receives unexpected cash.
Pros of Settling Early
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Interest savings: Pay less over the lifetime of the loan.
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Full asset ownership: Own vehicles, machinery, or equipment sooner.
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Reduced monthly obligations: Frees up cash flow for other priorities.
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Lower overall debt: Improves business balance sheets and creditworthiness.
For more insight on tax and finance planning, see our blog: Maximizing Tax Benefits of Asset Finance.
Cons to Consider
- Early repayment fees: Some agreements include ERCs or exit fees.
- Cash flow impact: Using a lump sum to settle may limit your working capital.
- Limited interest savings: If interest is front-loaded, early settlement may save less than expected.
Always weigh the total settlement cost versus the original repayment schedule to make an informed decision.
Example: Early Settlement in Action
Imagine a logistics business financed three vans through a hire purchase agreement over four years. Two years in, a large client payment allows the business to consider early settlement.
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Settlement figure: £22,000
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Remaining repayments: £26,000
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Early settlement fee: £500
Savings: £26,000 – £22,000 – £500 = £3,500
By paying early, the business owns the vans outright and eliminates monthly payments.
Questions to Ask Before Settling Early
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Is there an early settlement fee?
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How much interest will I save?
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Will I receive confirmation that the agreement is closed?
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Will this affect my ability to borrow in the future?
Always request a written settlement figure from your lender, valid for a limited time.
Impact on Credit Score
In most cases, early settlement does not negatively affect credit scores. It can show lenders that you are responsible. However, stopping all credit use may slightly reduce your score due to no ongoing repayment activity.
For additional guidance, see: Essential Benefits of Working with FCA-Regulated Finance Brokers.
Final Thoughts
Early settlements can be a strategic move for businesses with surplus cash. They can reduce interest payments, give full ownership of assets, and improve financial flexibility. Always evaluate fees, interest saved, and cash flow before deciding.
If your business is considering asset finance or other loans, speak with a regulated broker to calculate whether early settlement is right for you.
FAQs
Q: How do I request an early settlement?
A: Ask your lender or broker for a settlement figure.
Q: Are there fees for settling early?
A: Some agreements include early repayment charges. Always check your contract.
Q: Do I save money by settling early?
A: Often yes, especially on interest, but it depends on your agreement structure.
Q: What happens to the asset after early settlement?
A: In hire purchase, you usually take full ownership once settled.
Ready to Make Asset Finance Work for Your Business?
Partner with MacManus Asset Finance Ltd, an independent broker established in 2005, helping UK SMEs access tailored finance solutions. Our friendly, professional, and consultative team works across all industries and can guide you through hire purchase, leasing, and finance lease options. With access to over 60 finance companies and full FCA authorisation, we ensure your business finds the right solution for growth.
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