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Why early repayment charges exist
When a lender prices a business loan, it assumes a certain duration over which it will earn interest. If you repay early, the lender loses the future interest it expected. An early repayment charge is a contractual mechanism to partially compensate for that loss. It is not a penalty in the pejorative sense — it is a pricing assumption built into the product.
Not all business loans carry an ERC. Short-term facilities and revolving credit lines frequently allow early repayment without charge. Term loans of two years or more are more likely to include one.
How ERCs are typically calculated
The most common structures are: a flat fee (e.g. two months' interest); a sliding scale that reduces the charge the closer you are to the end of the term; or a percentage of the outstanding balance. Some agreements specify a minimum charge period — meaning you pay interest for at least three or six months even if you repay on day one.
Illustrative example: a £100,000 loan at 8% annual interest with a three-month minimum interest clause would carry an ERC of approximately £2,000 if repaid in the first three months. This is illustrative and not a quote; your actual charge depends on your specific agreement.
Factor-rate products and early repayment
If your facility uses a factor rate rather than an interest rate, repaying early almost never reduces the total cost. The full multiplied amount is typically owed regardless of when you repay. This is structurally different from an ERC — there is no charge per se, but there is also no saving. Some lenders offer a settlement discount for early closure; check whether this is in your term sheet before assuming it applies.
For more context on how factor rates work, see APR or factor rate — what's the difference?
What to check before signing
Before you accept any loan offer, read the repayment section of the term sheet and look for: any minimum interest period, a defined ERC formula, whether the ERC applies to the original balance or the outstanding balance, and whether there is a window near the end of the term where you can repay free of charge.
If you are refinancing an existing facility, factor any ERC on the current loan into your cost comparison. A lower rate on a new loan may not deliver net savings if the exit cost on the existing facility is substantial.
Frequently asked questions
Can I negotiate out of an early repayment charge?
Sometimes. If you have strong financials and are comparing multiple offers, some lenders will waive or reduce the ERC as a competitive concession. It is worth asking directly during negotiation rather than assuming the charge is fixed.
Does repaying early affect my credit file as a limited company?
Early repayment is generally neutral or positive on a commercial credit file — it demonstrates the business can service debt. The charge itself does not create a negative marker. What matters to future lenders is whether payments were made on time throughout the facility.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.