- Most SBA loans have NO prepayment penalty—only loans with maturities of 15 years or longer are subject to penalties.
- Business acquisition, working capital, and equipment loans (typically 10-year terms) can be paid off early without any cost.
- For 15+ year loans, penalties only apply during the first 3 years and only on amounts exceeding 25% of the balance per year.
- After year 3, even 15+ year loans can be paid off completely without penalty.
Planning to pay off your SBA loan early? Good news: most SBA loans have no prepayment penalty. Per SBA SOP 50 10 8 and 13 CFR § 120.223, prepayment penalties only apply to loans with maturities of 15 years or longer.
This guide covers when SBA prepayment penalties apply, how they’re calculated, and strategies to minimize or avoid them entirely.
SBA Prepayment Penalty Overview
The Key Rule
Per 13 CFR § 120.223 and SBA SOP 50 10 8:
“For loans with a maturity of 15 years or longer, the Borrower must pay to SBA a Subsidy Recoupment Fee when the Borrower voluntarily prepays more than 25% of its loan in any 1 year during the first 3 years after first disbursement.”
This means: Loans under 15 years have NO prepayment penalty. You can pay them off at any time, in any amount, without cost.
Why This Matters
Most SBA 7(a) loans for business acquisitions, working capital, and equipment have 10-year terms. These loans can be paid off early at any time without penalty—giving you flexibility to refinance, sell your business, or simply pay down debt when cash flow allows.
Loans with No Prepayment Penalty
Penalty-Free Loan Types
The following SBA loan types typically have no prepayment penalty because their terms are under 15 years:
- Business acquisition loans: Typically 10-year terms
- Working capital loans: Maximum 10-year term per SBA rules
- Equipment loans: Up to 10 years (or useful life of equipment)
- SBA 7(a) Small Loans: Under $500,000, usually 10-year terms
- SBA Express loans: Maximum 10-year term (25 years for real estate)
- Any loan with maturity under 15 years
If you’re acquiring a business and want maximum flexibility, a 10-year loan term gives you the ability to pay off early, refinance, or sell without worrying about prepayment penalties.
Freedom to Prepay
If your loan has no prepayment penalty, you can:
- Pay extra principal whenever cash flow allows
- Make lump-sum payoffs when you have excess funds
- Refinance freely if better terms become available
- Pay off completely at any time without cost
- Sell your business and pay off the loan without penalty
When Penalties Apply (15+ Year Loans)
Loans Subject to Penalty
Prepayment penalties apply to:
- SBA real estate loans: Often 20-25 year terms
- Any 7(a) loan with 15+ year maturity
Penalty Structure
For loans with maturities of 15 years or longer, the penalty decreases each year:
| Year of Prepayment | Penalty Rate | Notes |
|---|---|---|
| Year 1 | 5% | Of prepaid amount above 25% threshold |
| Year 2 | 3% | Of prepaid amount above 25% threshold |
| Year 3 | 1% | Of prepaid amount above 25% threshold |
| Year 4+ | 0% | No penalty—prepay freely |
The Four Conditions
All four conditions must be met for the penalty to apply:
- Loan maturity is 15 years or longer
- Prepayment is voluntary (not due to death, insurance proceeds, etc.)
- You prepay more than 25% of balance in one year
- Prepayment occurs within the first 3 years
The 3-year clock starts at “first disbursement”—when the loan funds, not when you close. If your loan funds in phases, confirm the exact start date with your lender.
How Penalties Are Calculated
Calculation Formula
For qualifying loans (15+ year terms), the penalty applies only to the amount prepaid above the 25% threshold:
Penalty = (Prepaid Amount – 25% of Balance) × Penalty Rate
Example: 25-Year Real Estate Loan
| Item | Amount |
|---|---|
| Loan balance | $1,000,000 |
| Action | Full payoff in Year 1 |
| 25% threshold (penalty-free) | $250,000 |
| Amount subject to penalty | $750,000 |
| Penalty rate (Year 1) | 5% |
| Prepayment penalty | $37,500 |
Example: 10-Year Business Acquisition Loan
| Item | Amount |
|---|---|
| Loan balance | $500,000 |
| Action | Full payoff in Year 1 |
| Prepayment penalty | $0 (loan term under 15 years) |
The 25% Threshold
Making Extra Payments Without Penalty
Even on 15+ year loans, you can prepay up to 25% of the outstanding balance in any 12-month period without triggering the penalty. This creates a powerful strategy for paying down your loan faster.
The 25% threshold resets each year based on your current balance. As you pay down the loan, the dollar amount you can prepay penalty-free decreases, but you’re also building equity faster.
Strategic Extra Payments Example
For a $1,000,000, 20-year real estate loan:
| Year | Starting Balance | 25% Penalty-Free Prepayment | Penalty? |
|---|---|---|---|
| Year 1 | $1,000,000 | $250,000 | No |
| Year 2 | $750,000 | $187,500 | No |
| Year 3 | $562,500 | $140,625 | No |
| Year 4+ | $421,875 | Pay off entirely | No (outside 3-year window) |
Using this strategy, you could pay down over $578,000 without any prepayment penalty—and the remaining balance can be paid off in Year 4 with no penalty.
SBA 504 Prepayment Rules
Different Structure
SBA 504 loans have different prepayment rules than 7(a) loans. The CDC/SBA portion (typically 40% of the project) is funded through debentures sold on the secondary market, which creates different prepayment dynamics.
504 Prepayment Restrictions
- Declining penalty schedule based on debenture terms
- Penalty typically applies for first 10 years of CDC portion
- Bank’s first mortgage portion (50%) has its own prepayment terms
- Prepayment requires payoff of the entire debenture, not just your loan
SBA 504 prepayment penalties can be significant and extend for 10 years. If you anticipate needing to sell or refinance within 10 years, a 7(a) loan may offer more flexibility despite potentially higher rates.
Consult Your CDC
If you have a 504 loan and want to prepay, contact your Certified Development Company for specific prepayment terms and costs. Each debenture pool has different characteristics.
Prepayment Strategy
Know Your Loan Term
First, check your loan documents for the maturity term:
- Under 15 years: No penalty—prepay freely at any time
- 15+ years: Penalty may apply in first 3 years on amounts over 25%
For Penalty-Free Loans (Under 15 Years)
- Pay extra principal whenever cash flow allows
- Consider lump-sum payoffs when you have excess funds
- Refinance freely if better terms become available
- Sell your business without worrying about prepayment costs
For 15+ Year Loans
- Use the 25% threshold to pay down without penalty each year
- Wait until Year 4+ for full payoff without penalty
- Calculate whether interest savings exceed penalty cost
- Consider timing if you’re close to a year boundary
Even if a prepayment penalty applies, it may still make financial sense to pay off early. Compare the penalty cost against the interest you’d save over the remaining loan term. Often, the interest savings far exceed the penalty.
Involuntary Prepayment
Per SBA rules, certain involuntary prepayments don’t trigger penalties:
- Death of the borrower that results in prepayment
- Insurance proceeds used to pay down the loan
- Condemnation awards
- Other involuntary circumstances (consult your lender)
Most SBA borrowers never pay a prepayment penalty because most loans have terms under 15 years. If you have a longer-term real estate loan, use the 25% annual threshold to pay down aggressively without penalty, and remember that after Year 3, you can pay off the entire balance penalty-free. Always check your specific loan documents and contact your lender to confirm terms before making large prepayments.
Frequently Asked Questions
No. Per SBA SOP 50 10 8, prepayment penalties only apply to loans with maturities of 15 years or longer. Most business acquisition and working capital loans (10-year terms) have no prepayment penalty whatsoever.
No. Loans with maturities under 15 years have no prepayment penalty. You can pay off early at any time, make extra principal payments, or refinance without any cost.
SBA real estate loans often have 20-25 year terms, which means they may be subject to the prepayment penalty during the first 3 years if you prepay more than 25% of the balance. After Year 3, there’s no penalty regardless of how much you prepay.
Yes. You can prepay up to 25% of the outstanding balance per year without triggering any penalty. This allows you to pay down your loan significantly faster while avoiding prepayment costs.
Only if the loan has a 15+ year term and you’re within the first 3 years. For loans under 15 years, no penalty applies regardless of reason. For 15+ year loans after Year 3, no penalty applies.
SBA 7(a) loans follow the rules described above (penalty only for 15+ year loans in first 3 years). SBA 504 loans have different, typically more restrictive prepayment terms because the CDC portion is funded through debentures. 504 penalties often apply for 10 years. Contact your CDC for specific terms.
