Glossary
A charge for repaying a loan before the end of its term.
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Short answer: A prepayment penalty is a charge for repaying a loan before the end of its term, because the lender loses expected interest; a term loan might charge three months' interest. Advances work differently: the payback is usually fixed, so early repayment saves nothing unless an early-payoff discount is written in.
Key facts
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A charge for repaying a loan before the end of its term.
Some loans charge a fee for early repayment because the lender loses expected interest. Advances often have a fixed payback instead, sometimes with an early-payoff discount.
It changes whether refinancing or early repayment saves money.
A term loan might charge three months' interest if repaid early; an advance with no discount costs the full payback regardless.
Canadian lenders' prepayment terms vary widely.
When reviewing a refinance or buyout, the payoff amount includes any penalty. Knowing it avoids surprises.
Owners often assume paying early is always cheaper. With a fixed payback and no discount, it is not.
For a term loan, the penalty may be a set number of months of interest or a percentage of the balance. For an advance, the payback is typically fixed, so paying early does not save money unless the agreement offers a discount. For a line of credit, there is usually no penalty because you can repay at any time.
When you might refinance or sell the business within the term, the prepayment terms matter as much as the rate. A slightly cheaper loan with a heavy penalty can cost more than a slightly pricier one you can exit freely.
Ask each provider to show, in dollars, what it would cost to close the agreement after three months and after six months. Those two numbers make the comparison concrete.
A Kelowna winery expects to receive a large distribution payment in four months and wants to clear a loan early when it arrives. One lender charges three months' interest to repay early; another has no penalty but a slightly higher rate. Over four months, the second is cheaper. Without asking the prepayment question, the winery would have chosen the lower headline rate and paid more.
Key takeaway: Ask every provider what it costs, in dollars, to close the agreement early. That answer can change which offer is cheapest.
Reviewed by the Merchant Fund Express team on October 12, 2026. Official pages checked as of that date.
Advances usually have a fixed payback; some offer discounts for early payoff.
See the related guides and the comparison pages, or apply and ask.
No. It is educational information, and agreements vary.
Educational information only. It is not legal, tax or accounting advice.
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