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Should I pay down debt or hold the cash?
Paying down a time-priced debt is a guaranteed return. Paying down a fixed-cost one returns nothing at all, and the pitch for both is identical.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
Should I use spare cash to pay down business debt early, or keep it as a reserve?
Pay down debt whose cost accrues with time — simple-interest loans, drawn lines, revolving card balances — because every dollar repaid cancels future interest at a guaranteed return. Do not pay down a fixed-cost facility early unless the contract contains an early-payoff discount with a schedule, since the cost was set at signing and prepaying it saves nothing. Check which kind you have by looking for a stated total repayment amount rather than a rate, then decide against the value of the reserve.
There is one question here and it is a document question: does the cost of this debt accrue over time, or was it fixed the day you signed? On a simple-interest facility, every dollar you repay early cancels interest that would otherwise accrue — a certain, calculable return. On a factor-priced advance, the cost was set at signing and forms part of a fixed total repayment amount. Paying it early moves the same dollars sooner and saves nothing.
Salespeople describe early repayment as saving money on both. On one of them it is simply false, and that false belief causes owners to drain reserves for a zero return.
Where paying down wins
- Run it to term: $11,027 of remaining interest.
- Pay $20,000 down now and keep the same payment: the $40,000 balance clears in about 18.8 months with $4,613 of interest.
- Saving: $6,414 on $20,000 deployed — a 32.1% return over the period, guaranteed, with no counterparty risk.
Confirm two things before you do it. That the interest is simple, not precomputed — precomputed interest is baked in and a rebate formula decides what you actually get back. And that there is no prepayment penalty; a 3% charge on the balance would take $1,800 of that $6,414 saving straight back.
Where holding the cash wins
The $38,000 is the remaining balance of a fixed sum. There is no accruing interest to cancel. Paying it off today rather than over the next four months saves exactly nothing — unless the agreement contains an early payoff discount with a stated schedule. If it offers 8% of the remaining balance, that is $3,040, an 8% return. Worth having, but a long way from 32%, and many agreements offer nothing at all.
Meanwhile the cash does something. Against a $28,000 monthly fixed-cost base, $20,000 held in the account is about three weeks of runway — three weeks in which a late customer payment does not become a missed payroll, and a missed payroll does not become the reason you take a second position at 1.45.
Order of attack when several debts accrue
If you have more than one time-priced facility, sequence matters.
- Anything revolving at the highest rate, typically a carried card balance. It accrues daily and the minimum payment structure means it barely amortises.
- Any facility with a covenant you are close to breaching. Reducing the balance may restore headroom, which is worth more than the interest.
- Any facility with a personal guarantee you want released. Some guarantees fall away at a stated balance. Ask.
- Everything else, highest rate first.
What should not be on that list is a fixed-cost advance with no discount clause, however much you dislike the daily debit. Disliking it is not a return.
How much reserve is enough
The honest answer comes from your own history rather than a rule of thumb.
- What is your monthly fixed-cost base — the number that goes out whether you sell anything or not?
- What was your largest unplanned outflow in the last three years?
- How many weeks of that fixed-cost base do you currently hold?
- What does replacement money cost you today, per dollar?
If replacement money costs 30 to 45 cents per dollar, holding reserve is worth a lot and paying down a 13.5% loan is a closer call than the raw return suggests. If you have a genuinely committed line at bank pricing, the reserve is cheap to rebuild and paying down wins more easily.
The questions that settle it
- Does this agreement state a rate and an accrual, or a total repayment amount? That sentence decides the whole thing.
- Is there a prepayment penalty or an early payoff discount, and what is the formula? Get the clause number.
- Is the interest simple or precomputed? Ask for the payoff figure at two different dates — if it barely moves, it is precomputed.
- How many weeks of fixed costs do I hold, and what does replacement money cost? Both numbers, written down, before you move any cash.
What to ask for, and what to refuse
Ask for a written payoff quote good through a named date, itemised, before you send anything. Reconcile it against your own count of cleared debits from bank statements — payoff figures and owner expectations disagree more often than they agree.
Ask whether a partial prepayment reduces the term or the payment. Reducing the term saves far more interest; reducing the payment mostly does not.
Ask, on a fixed-cost deal, for the discount clause in writing. A verbal assurance that "we'll take care of you on the payoff" is not a term.
Refuse to prepay a fixed-cost facility for a zero return because the debit annoys you. Refuse to spend your last reserve on any early payoff. And refuse to prepay anything before you have confirmed that the filing gets terminated afterwards — a stale UCC-1 on a paid-off facility blocks the next deal and takes weeks to clear.
Where this applies
Related questions
Should I use spare cash to pay down business debt early, or keep it as a reserve?
Pay down debt whose cost accrues with time — simple-interest loans, drawn lines, revolving card balances — because every dollar repaid cancels future interest at a guaranteed return. Do not pay down a fixed-cost facility early unless the contract contains an early-payoff discount with a schedule, since the cost was set at signing and prepaying it saves nothing. Check which kind you have by looking for a stated total repayment amount rather than a rate, then decide against the value of the reserve.
Which funding products does this apply to?
Merchant Cash Advance, Term Loan, Business Line of Credit, Business Credit Cards. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Are the figures here quotes?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What a particular lender charges is on that lender's page, where it publishes it at all.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
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