dmarc117 Posted January 26, 2009 Share Posted January 26, 2009 general question....do small biz loans have a pre-pay penalty? Quote Link to comment Share on other sites More sharing options...
TheShiznit Posted January 26, 2009 Share Posted January 26, 2009 general question....do small biz loans have a pre-pay penalty? I have not seen any...but I am not a banker. I would think it depends on the risk presented at the time of the loan....the more risky the chance there is a pre-pay penalty to compensate the bank for the risk. Quote Link to comment Share on other sites More sharing options...
i_am_the_swammi Posted January 26, 2009 Share Posted January 26, 2009 depends on the lender...some do, some don't....prepayments can be negotiated out in lieu of something else. But government back SBA loans (7A) definitely have prepayment penalties. From their website: Prepayment Penalties a. have a maturity of 15 years or more where the borrower is prepaying voluntarily; b. the prepayment amount exceeds 25 percent of the outstanding balance of the loan; AND c. the prepayment is made within the first 3 years after the date of the first disbursement (not approval) of the loan proceeds. The prepayment fee calculation is as follows: a. during the first year after disbursement, 5 percent of the amount of the prepayment; b. during the second year after disbursement, 3 percent of the amount of the prepayment; or c. during the third year after disbursement, 1 percent of the amount of the prepayment. SBA Prepayment link Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted January 26, 2009 Share Posted January 26, 2009 depends on the lender...some do, some don't....prepayments can be negotiated out in lieu of something else. But government back SBA loans (7A) definitely have prepayment penalties. From their website: Prepayment Penalties a. have a maturity of 15 years or more where the borrower is prepaying voluntarily; b. the prepayment amount exceeds 25 percent of the outstanding balance of the loan; AND c. the prepayment is made within the first 3 years after the date of the first disbursement (not approval) of the loan proceeds. The prepayment fee calculation is as follows: a. during the first year after disbursement, 5 percent of the amount of the prepayment; b. during the second year after disbursement, 3 percent of the amount of the prepayment; or c. during the third year after disbursement, 1 percent of the amount of the prepayment. SBA Prepayment link Why would the government charge a prepayment penalty on a small business loan? Wouldn't they be happy a. The business is successful enough to pay back early b. The business is capable of paying them back at all Quote Link to comment Share on other sites More sharing options...
i_am_the_swammi Posted January 26, 2009 Share Posted January 26, 2009 Why would the government charge a prepayment penalty on a small business loan? Wouldn't they be happy a. The business is successful enough to pay back early b. The business is capable of paying them back at all Points valid, but nonetheless, loans have a cost, and when a loan is made, it is assumed that those funds will generate a return for the term of the loan. The last thing a lender wants it to loan money for 10 years, and have it paid back in 1-2 years. They want to earn that interest over 10 years. Most lenders don't want to be short-term loan sharks...and worse, not earn the interest rate that a loan shark might garner. For instance, if I borrowed $1M for 10 years at 5% interest, I'd pay $50K per year, or a total of $500K, over the ten years. But if I wanted to pay that $10M back after my first yaer, the lender would only have made $50K on the same loan. But the cost to generate the loan remains constant. Now suppose the cost to underwrite/due diligence/etc was $15K. Now the bank has only made $35K instead od their anticipated $985K. On a percentage basis, the cost not being spread-out kills their return. Thus, you get hit with a fee for shortening the term....very common. But notice that fee goes away after year 3....I imagine thats their own internal "mendoza" line. Quote Link to comment Share on other sites More sharing options...
dmarc117 Posted January 26, 2009 Author Share Posted January 26, 2009 Why would the government charge a prepayment penalty on a small business loan? Wouldn't they be happy a. The business is successful enough to pay back early b. The business is capable of paying them back at all Points valid, but nonetheless, loans have a cost, and when a loan is made, it is assumed that those funds will generate a return for the term of the loan. The last thing a lender wants it to loan money for 10 years, and have it paid back in 1-2 years. They want to earn that interest over 10 years. Most lenders don't want to be short-term loan sharks...and worse, not earn the interest rate that a loan shark might garner. For instance, if I borrowed $1M for 10 years at 5% interest, I'd pay $50K per year, or a total of $500K, over the ten years. But if I wanted to pay that $10M back after my first yaer, the lender would only have made $50K on the same loan. But the cost to generate the loan remains constant. Now suppose the cost to underwrite/due diligence/etc was $15K. Now the bank has only made $35K instead od their anticipated $985K. On a percentage basis, the cost not being spread-out kills their return. Thus, you get hit with a fee for shortening the term....very common. But notice that fee goes away after year 3....I imagine thats their own internal "mendoza" line. my thinking was that most would have pre-pay penalties for the reason im thinking......my wife wants to start a biz. we have enough cash to bankroll it and get it going. but if no pre-pay, why not get a loan and have the bank take the risk for the 1st year. then if the biz is successful, just pay off the loan. Quote Link to comment Share on other sites More sharing options...
twiley Posted January 26, 2009 Share Posted January 26, 2009 Some do, some don't. Just depends on where you get the loan. Good luck and make sure you have a solid business plan. Quote Link to comment Share on other sites More sharing options...
dmarc117 Posted January 26, 2009 Author Share Posted January 26, 2009 Some do, some don't. Just depends on where you get the loan. Good luck and make sure you have a solid business plan. yep and ty. i already told her to take her time in this economy. no need to rush out there at this time. Quote Link to comment Share on other sites More sharing options...
Big Country Posted January 26, 2009 Share Posted January 26, 2009 Points valid, but nonetheless, loans have a cost, and when a loan is made, it is assumed that those funds will generate a return for the term of the loan. The last thing a lender wants it to loan money for 10 years, and have it paid back in 1-2 years. They want to earn that interest over 10 years. Most lenders don't want to be short-term loan sharks...and worse, not earn the interest rate that a loan shark might garner. For instance, if I borrowed $1M for 10 years at 5% interest, I'd pay $50K per year, or a total of $500K, over the ten years. But if I wanted to pay that $10M back after my first yaer, the lender would only have made $50K on the same loan. But the cost to generate the loan remains constant. Now suppose the cost to underwrite/due diligence/etc was $15K. Now the bank has only made $35K instead od their anticipated $985K. On a percentage basis, the cost not being spread-out kills their return. Thus, you get hit with a fee for shortening the term....very common. But notice that fee goes away after year 3....I imagine thats their own internal "mendoza" line. On the flip side, by getting paid early, it frees them to then lend that money again to someone else. Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted January 26, 2009 Share Posted January 26, 2009 On the flip side, by getting paid early, it frees them to then lend that money again to someone else. My thought too. I suppose accounting rules let them book the entire interest at the time of the loan so as to inflate their books. Then if the loan gets repaid early, at least they can offset the penalty against the "lost" income they have to write down. Quote Link to comment Share on other sites More sharing options...
i_am_the_swammi Posted January 26, 2009 Share Posted January 26, 2009 On the flip side, by getting paid early, it frees them to then lend that money again to someone else. Which is not what they want to do. Think of it this way: Assuming an apples-to-apples interest rate, would you rather lend $1M for 10 one-year terms, or lend it once for 10 years? Quote Link to comment Share on other sites More sharing options...
geeteebee Posted January 26, 2009 Share Posted January 26, 2009 my thinking was that most would have pre-pay penalties for the reason im thinking......my wife wants to start a biz. we have enough cash to bankroll it and get it going. but if no pre-pay, why not get a loan and have the bank take the risk for the 1st year. then if the biz is successful, just pay off the loan. In this lending environment, I'd be skeptical that you could get a non-recourse loan for a startup business, especially from a private lender. So the bank is not really taking the risk, they are just the ones fronting the cash. Quote Link to comment Share on other sites More sharing options...
TheShiznit Posted January 26, 2009 Share Posted January 26, 2009 my thinking was that most would have pre-pay penalties for the reason im thinking......my wife wants to start a biz. we have enough cash to bankroll it and get it going. but if no pre-pay, why not get a loan and have the bank take the risk for the 1st year. then if the biz is successful, just pay off the loan. first of all, you will not get a business loan....it will be a loan you personally sign for. In this market, I would fall over if a bank would lend money to the business rather than the owner....that way they get you and your assets as collateral. Quote Link to comment Share on other sites More sharing options...
TheShiznit Posted January 26, 2009 Share Posted January 26, 2009 In this lending environment, I'd be skeptical that you could get a non-recourse loan for a startup business, especially from a private lender. So the bank is not really taking the risk, they are just the ones fronting the cash. LOL...didn't see this before I posted!!! Quote Link to comment Share on other sites More sharing options...
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