Quick answer

Most lenders allow early repayment, but whether you pay a fee depends on the contract. Fixed-rate term loans and many hire‑purchase/asset finance deals commonly include an early repayment charge. Flexible facilities, some variable-rate term loans and overdrafts often permit overpayments or full settlement with no or limited fees. If you’re thinking of settling, Get Quote Now or ask your lender for a written settlement figure before you act.

What “early repayment” and “early repayment charge (ERC)” mean

Early repayment (also called early settlement or prepayment) is paying off part or all of a loan before the contractual end date.

Early Repayment Charge (ERC) is a fee some lenders impose when a borrower settles a loan early. It compensates the lender for lost interest or for costs of breaking hedging/funding arrangements.

How an ERC is described varies by product:

• Term loans (secured or unsecured) — ERCs are common, especially on fixed-rate, multi-year loans.
• Asset finance / hire purchase — manufacturers’ or funders’ breakage and valuation fees can apply until final settlement.
• Invoice finance / factoring — typically no ERC for ending the facility but exit administration fees may apply.
• Overdrafts & flexible facilities — often allow overpayments; formal ERCs are rare but check for admin fees.
• Merchant cash advances — not a traditional ERC, but early exit often carries discounts or final settlement calculations.

Do business lenders usually charge penalties for early repayment?

There’s no single answer — practices vary by lender, loan product and how the deal was arranged (direct or via broker). As a general rule:

• Fixed-rate, long-term loans: Frequently include ERCs. Lenders calculate the cost of lost interest or apply a formula tied to remaining term.
• Secured commercial mortgages and term loans: Often include percentage‑based ERCs or sliding scales (higher earlier in the term, tapering later).
• Asset finance/Hire Purchase: Breakage costs can include residual balancing, asset valuation, and administrative fees until the contract end.
• Short-term and flexible loans: Many allow penalty-free overpayments up to certain amounts (commonly a 5–20% annual allowance) — beyond that you may face charges.
• Merchant cash advances: No formal ERC but settlement calculations can effectively charge a premium to exit early.

How ERCs are calculated (examples):

• A flat percentage of outstanding balance (e.g., 3% of the remaining capital).
• A percentage of remaining interest (e.g., 50% of interest that would have been paid).
• A fixed fee dependent on remaining months (sliding scale).
• Breakage cost based on the lender’s hedging/funding losses (more common on large commercial loans).

Remember: wording in the contract controls. UK Business Loans is an introducer and does not guarantee lender terms — always verify directly.

When can you generally repay early without penalties?

You may be able to repay with no charge in these circumstances:

• Loan terms explicitly state “no ERC” or “no early repayment fee”.
• Variable-rate or fully flexible facilities that permit overpayments and full settlement without penalty.
• Lenders often allow small annual overpayments (typical example: 10% of the original loan or 10% p.a.) without fee.
• Close to maturity — some lenders waive charges when only a short period remains.
• When refinancing with the same lender via a variation or restructuring (may avoid ERCs).

Note on consumer-style protections: statutory cooling-off applies in some consumer credit situations, but most business borrowers (limited companies and larger SMEs) do not have the same protections. If in doubt, speak to an accountant or solicitor before settling.

How to check if you’ll incur a penalty (step-by-step)

Here’s what to do before making any payment you hope will fully settle a facility.

1. Locate your loan agreement and read the early repayment / settlement clause.
2. Search for phrases like “Early Repayment Charge”, “Breakage”, “Settlement Figure” or “Settlement Statement”.
3. Check whether the ERC is a fixed amount, a percentage, a formula or based on lender costs.
4. Note any notice period (for example, 30 days) required to request a settlement figure.
5. Ask the lender in writing for a settlement figure and an itemised breakdown (capital, interest, ERC, admin fees).
6. If the loan was arranged by a broker, contact them for clarification — brokers often can get quicker figures and negotiate.
7. Compare the settlement cost to expected savings from repaying early (consider lost tax relief or cashflow impact).

Sample email you can send to your lender:

Dear [Lender name],

Please provide a written settlement figure for our business loan account [account number]. Please include:
- Outstanding capital
- Accrued interest to date
- Any Early Repayment Charge / breakage cost (with calculation)
- Any admin or legal fees on early settlement
- Notice or timing requirements to settle

Please confirm whether the figure is valid for a set number of days.

Kind regards,
[Your name]
[Company name]
  

If you need help interpreting your contract or want multiple options, Get Started Free Eligibility Check and we’ll match you with brokers who can request and review settlement figures on your behalf. This is not an application and will not affect your credit score.

Alternatives to repaying early

If an ERC is large, consider alternatives that may improve cash flow or reduce total cost:

• Refinance: Replace the loan with a cheaper facility — weigh the refinance costs against ERCs and potential savings.
• Overpay within permitted limits: Reduce interest cost without triggering ERC.
• Negotiate a settlement: Some lenders will accept a negotiated lump-sum lower than the contract ERC.
• Consolidate debts: Combine multiple loans into a single facility — check overall cost.
• Partial settlement: Reduce capital to lower monthly costs while deferring the remainder.

Pros & cons at a glance:

• Refinance: Pro — potentially lower interest. Con — upfront costs and possible ERC.
• Negotiate: Pro — reduced total outlay. Con — takes time and lender cooperation.
• Overpaying: Pro — simple and often fee-free to the permitted threshold. Con — limited by lender policy.

Get Quote Now to compare options from multiple lenders and brokers and see whether refinancing or negotiation is better in your case.

Costs beyond ERC to consider

• Administration or processing fees for settlement.
• Valuation, legal and discharge fees for secured loans.
• Tax implications — paying interest earlier can affect deductibility timing; consult your accountant.
• Opportunity cost — using cash to repay may reduce working capital for growth.
• Costs to refinance (arrangement fees, broker fees, early exit fees on other products).

Always ask the lender for a full written settlement figure showing every charge.

How UK Business Loans can help you

UK Business Loans does not lend money. We connect UK businesses (loans from around £10,000 upwards) with lenders and brokers who specialise in the right type of finance for your circumstances.

Our quick process:

1. Complete a short enquiry (takes 2 minutes).
2. We match you to brokers/lenders who can review your contract, request settlement figures and provide options.
3. Receive quotes and decide — there’s no obligation to proceed.

To compare options quickly, Free Eligibility Check — no obligation and it won’t affect your credit score.

Need general info on typical lending products? See our business loans page for a plain-English guide to common facilities and how they behave when repaid early.

FAQs

Next steps

Before you transfer funds, get a written settlement figure and compare options. If you’d like help interpreting terms or getting multiple settlement quotes, Get a Free Eligibility Check and we’ll match you with brokers and lenders who can help. Submitting an enquiry is not an application and will not affect your credit score.