Early repayment of business loans

Why early repayment matters

For a UK limited company, paying off a working-capital loan ahead of schedule frees up cash, removes a liability from the balance sheet and can lift your interest cover ratio — all of which help when you next approach a lender. But the headline question is simpler: does settling early actually save you money?

The answer depends entirely on how the facility prices interest and whether it carries an early repayment charge. Two loans of the same size and rate can produce very different settlement figures. Before you assume early repayment is a free win, read the agreement — or ask the lender for a written settlement quote, which they should provide on request.

Daily accrual versus fixed total cost

The single most important variable is how interest is calculated.

• Daily-accrual / reducing-balance facilities charge interest only on the outstanding principal for the days you actually hold the money. Repay early and you stop the clock — the saved interest is real and immediate. Most modern short-term facilities, including a flexible business credit facility, work this way.
• Fixed-total-cost facilities quote one all-in repayment figure at the outset. Here the cost is baked in, so repaying early may save little or nothing unless the agreement explicitly offers a rebate of unearned interest.

This is also why a quoted APR alone doesn't tell you the early-settlement story — you need the accrual method.

Early repayment charges explained

An early repayment charge (ERC) is a fee some lenders apply when you settle before the agreed term. It compensates the lender for interest they expected to earn. ERCs are common on longer fixed-rate term loans and rarer on short-term, daily-accrual products.

Where an ERC applies it is usually expressed as a percentage of the amount being repaid early, or as a set number of months' interest. The table below shows how different structures behave on an illustrative £50,000 balance settled halfway through term — figures are for illustration only, not Credicorp rates.

Facility type	Interest basis	Early settlement outcome
Short-term, daily accrual	On outstanding balance	Save remaining interest; ERC usually £0
Fixed-rate term loan	Often front-loaded	Possible ERC of 1–3% of balance
Fixed-total-cost advance	Pre-agreed lump sum	Limited saving unless rebate offered

How to get an accurate settlement figure

Never estimate from the original schedule. Ask the lender for a formal settlement figure valid to a stated date. A good quote should break out: the remaining principal, interest accrued to the settlement date, any ERC or administration fee, and the final total payable.

Check whether the figure includes VAT (most business loan interest does not, but fees might), and confirm how long the quote holds — interest keeps accruing daily on most facilities, so a quote from last week may already be stale. If the maths isn't clear, ask the lender to explain each line. A transparent lender will; that itself is a useful signal when choosing a business lender.

When early repayment is — and isn't — worth it

Settling early makes most sense when the facility accrues daily, carries no ERC, and you have surplus cash that isn't needed elsewhere in the business. In that case every day you clear the balance early is interest you never pay.

It makes less sense when a meaningful ERC wipes out the interest saving, or when draining cash to repay leaves you short of working capital and forced to borrow again at a worse rate. Cash kept in reserve has value too. The disciplined approach is to compare the net saving from early repayment against the return — or the risk reduction — of holding that cash. If you're managing tight inflows and outflows, our cash flow management guide helps you model the trade-off before you commit.