Why paying early saves nothing by default
Most short-term business financing has a fixed cost. It is quoted as a factor rate, or as a total interest amount written into the agreement. Either way, the dollars are set the day you sign.
Take $100,000 at a 1.30 factor. You owe $130,000. The $30,000 is fixed.
On an interest-rate loan, cost builds over time. Pay early and the interest stops.
A fixed cost does not build. It already exists. Pay the $130,000 in twelve months or in six, and you have paid the same $30,000. You just had the money for half as long.
That is the default. A prepayment discount is the exception, and it has to be written into your agreement.
What a prepayment discount is
A prepayment discount forgives some or all of the cost you have not yet paid, from the payoff date forward.
Three words in that sentence do the work:
- Some or all. The discount is a percentage. It might be 25%. It might be 100%.
- Not yet paid. The cost inside the payments you already made is gone. The discount applies only to what is left.
- Forward. The clock stops on the payoff date. Nothing is refunded for the weeks before it.
The math
One example, used throughout: a $100,000 advance at a 1.30 factor, repaid in 52 weekly payments of $2,500, with no other fees. The cost is spread evenly, so each payment carries about $577 of it.
What you save, by payoff date and discount
| Pay off after | No discount | 25% | 100% |
|---|---|---|---|
| 3 months | $0 | $5,625 | $22,500 |
| 6 months | $0 | $3,750 | $15,000 |
| 9 months | $0 | $1,875 | $7,500 |
The 100% column is also the cost still unpaid on each date. Every three months you wait, another $7,500 of it moves out of reach. A discount is worth the most when you use it early.
A longer term makes it worth more. Terms through our marketplace run to 36 months. On the same $100,000 at 1.30 spread over 36 months, paying off at month 12 with a 100% discount forgives $20,000, two thirds of the cost.
Paying off at 6 months, three ways
At the halfway point you have paid $65,000 and you still owe $65,000. Of that, $50,000 is the money you received and $15,000 is unpaid cost.
| Payoff | Total cost | Approx. APR | |
|---|---|---|---|
| No discount | $65,000 | $30,000 | 71% |
| 25% discount | $61,250 | $26,250 | 64% |
| 100% discount | $50,000 | $15,000 | 39% |
For comparison, the same advance held for the full 12 months costs $30,000 at roughly 54% APR.
Look at the first row. With no discount, paying off early costs the same $30,000 and pushes the APR from 54% to 71%. You paid full price for half the time.
On an interest-rate loan with the same payment and the same cost at full term, the payoff at 6 months would be about $56,690. The savings are built in.
Three forms a discount takes
1. A percentage of the remaining cost. The clearest kind. One large online lender publishes both ends of the range: borrowers who qualify for its prepayment benefit have 100% of the remaining interest waived, and those who do not still owe 75% of it. That second version is a 25% discount.
2. A payoff schedule. Some agreements list a lower payback amount for each payoff window. An illustration: pay off within 60 days and the factor drops to 1.15, within 90 days to 1.20, after that the full 1.30 applies. Miss a window by a day and you move to the next price.
3. Nothing. The agreement is silent, or says the full purchased amount is due. Then the table above applies: $0.
At renewal, the discount decides what you net
Most businesses do not pay off early with their own cash. They renew. The lender issues a new advance and uses part of it to clear the old balance.
Whether the unpaid cost on the old balance is forgiven decides how much of the new money reaches your account.
Same example. At 6 months you renew with a new $100,000 at a 1.30 factor.
| Old balance paid off | Cash you receive | Cost of both advances | Combined APR | |
|---|---|---|---|---|
| No discount | $65,000 | $35,000 | $60,000 | 63% |
| 25% discount | $61,250 | $38,750 | $56,250 | 59% |
| 100% discount | $50,000 | $50,000 | $45,000 | 47% |
With a 100% discount, the new advance pays off only the $50,000 you still hold. You net $15,000 more from the same new advance, and the effective rate across both advances drops from 63% to 47%.
Without a discount, the $15,000 of unpaid cost is folded into the new advance, and the new factor rate is charged on that $15,000 too. You are paying a fee on a fee.
Before you sign a renewal, ask for one number: how much lands in my account?
Who pays the lender off matters
Lenders often tie the discount to the source of the payoff.
- Your own cash. Usually qualifies, if the agreement offers a discount at all.
- A bank, commercial, or SBA loan. Many lenders, including our primary lender, Kapitus, forgive 100% of the remaining cost when a commercial or SBA loan pays them off. You outgrew the product. They want you back next time.
- Another short-term lender. Being paid off by a like product, another short-term working capital loan or advance, often does not qualify. The lender lost the account to a competitor and has no reason to make that cheaper.
So the same payoff on the same date can cost $50,000 or $65,000, depending on where the money comes from. Ask before you refinance, not after.
The fine print to check
- Do you have to qualify? Some lenders require every payment to date to be on time, or a minimum number of payments made.
- Is it automatic or requested? Some discounts apply only if you ask for them in writing.
- What is the payoff good through? With daily or weekly payments, the payoff amount changes every few days. A payoff letter should state the amount and the date it is good through.
- What does “remaining cost” mean in your agreement? Spread evenly, front-loaded, or something else. It changes the dollar figure.
What the law says you must be told
California requires a provider of sales-based financing to tell you, before you sign, which of these is true:
- If you pay off faster than required, you still must pay all or a portion of the finance charge, up to a stated dollar amount.
- Or you will not be required to pay any portion of the finance charge other than unpaid interest accrued.
The same disclosure must say whether paying early triggers additional fees.
Ten states had commercial financing disclosure laws as of March 2026. Outside them, a lender may not volunteer this. Ask anyway.
What our primary lender publishes, and what it does not
- Business loans: Kapitus says there are no early payment penalties.
- Line of credit: Kapitus says that if you repay early, no interest is charged for that portion.
- Revenue-based financing: the public page does not address early payoff.
- Not on its site: in our experience, Kapitus forgives 100% of the remaining cost when a commercial or SBA loan pays off the balance. Get it in your agreement.
“No penalty” and “discount” are not the same thing. No penalty means you are not charged extra. A discount means you are charged less.
The opposite case
Some long-term loans go the other way. Instead of a discount for paying early, they charge a penalty. Commercial mortgages and some SBA loans can carry one for the first few years. Before you use cheap long-term money to pay off expensive short-term money, check both agreements: the discount on the one you are leaving and the penalty on the one you are entering.
Eight questions to ask before you sign
- Is there a prepayment discount? What percentage?
- A percentage of what? The remaining cost, or something else?
- What is my payoff amount in dollars after 3 months? After 6?
- Do I have to qualify for the discount, or is it automatic?
- Does it depend on who pays you off? My cash, a bank or SBA loan, or another lender?
- If I renew, is the unpaid cost on my old balance forgiven?
- Is there any fee for paying early?
- What will the payoff letter show, and how long is it good for?
Get the answers in the agreement, not in an email.
How we calculated this
The example spreads the $30,000 cost evenly over 52 weekly payments. Unpaid cost at 13, 26, and 39 weeks is $22,500, $15,000, and $7,500. A discount is applied to that unpaid cost and subtracted from the remaining balance.
APR is the weekly rate at which all payments, including the payoff, equal the $100,000 received, multiplied by 52. The renewal figures treat both advances as one stream: $100,000 in, 26 payments, the net cash from the renewal in, then 52 more payments. This is the same method as our factor rate vs APR guide. Figures are rounded to the nearest whole percent.
Your agreement may count the unpaid cost differently. The only number that matters is the payoff amount your lender puts in writing.
Sources
- California Code of Regulations, title 10, section 914, disclosure format for sales-based financing, prepayment rows
- NerdWallet: OnDeck Business Loans review, updated December 19, 2025, for the published 100% and 75% prepayment terms
- Kapitus product pages for business loans, lines of credit, and revenue-based financing, checked October 13, 2026
- Venable LLP: State Commercial Financing Disclosure Laws, March 2026