A loan that charges interest on its balance normally costs less when you pay it off early. A prepayment penalty claws some of that saving back. It is usually a percentage of the amount prepaid or of the balance, often shrinking each year.
SBA 7(a) loans have a defined version. On a loan with a maturity of 15 years or more, prepaying 25% or more of the outstanding balance in the first 3 years costs 5% of the prepayment in year 1, 3% in year 2 and 1% in year 3.
Example: Prepay $200,000 on a 25-year 7(a) loan with a $500,000 balance in its first year, and the fee is 5% of the prepayment, or $10,000.
Merchant cash advances work differently. The cost is fixed at signing, so there is usually no penalty, but there is no saving either unless the contract has an early payoff discount.
Sources
- Terms, conditions, and eligibility (7(a) loan program) — U.S. Small Business Administration (checked 2026-09-30)