Prepayment Penalty: Meaning in a Merchant Cash Advance
A prepayment penalty is a charge for paying off financing earlier than scheduled. Standard merchant cash advances don't usually have one, because the total payback is fixed, but many also don't give you a discount for paying early unless the contract says so.
What does prepayment penalty mean?
With a bank loan, paying early saves interest, so some banks add a penalty to protect their earnings. An MCA works differently. You agreed to deliver a set purchased amount, and paying it faster doesn't change that total. So there's usually nothing to penalize. The flip side is that there's often nothing to save, either, unless the funder has written in an early payoff discount.
Why does prepayment penalty matter to your business?
If you expect a big check soon or plan to refinance, the early payoff terms matter more than the factor rate. Read whether the contract offers a discount for early payoff and how it's calculated. If it doesn't, ask before you sign. Some funders will add one. For loans and lines of credit you're comparing against, check whether a real prepayment penalty applies.
What if you mix products?
If you're paying off an advance with a new loan, check the loan side too. A bank loan with a prepayment penalty can make a later refinance costly. Read both sets of terms before you commit so an early payoff on one doesn't trigger a charge on the other.
How do you spot one in a loan?
Look for words like prepayment, early termination or yield maintenance in a loan's terms. If any of them appear, ask for the charge in dollars at a few payoff points, so you can compare it fairly with an advance.
Where will you see it?
In the payoff or prepayment section of the contract, or in an addendum that lists early payoff discounts by timeframe.
Which terms are related to prepayment penalty?
The full list is in the glossary. Owners ask about this in Is an MCA factor rate monthly or for the whole advance?.
A term on your offer you don't recognize?
Send us the line and we'll tell you what it means. Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.