Prepayment penalty (prepayment charge)

A prepayment penalty, sometimes called a prepayment charge or fee, is what a lender asks for when a loan is paid off early, in whole or in part. A buyer meets it when financing a purchase and later refinancing, or when sale proceeds could pay a loan down. The loan agreement is where it is set. See how to finance a business acquisition in Canada for the wider picture.

What a federal program says

Under the Canada Small Business Financing Regulations, s.13(1)(c), a lender may require the borrower to pay a charge for prepaying all or part of a loan that the lender would charge on a conventional loan of the same amount. The CSBFP Guidelines also list conversion and prepayment charges among the fees and charges a lender may ask for. Lenders differ: BDC’s small business loan page lists no application or prepayment fees for its faster, smaller-loan option, and says certain fees apply to its larger, flexible-terms option.

What to check or ask

• Does the charge apply to full repayment, partial repayment, or both?
• How is the charge worked out, and does it change over the life of the loan?
• Would refinancing, or selling the business, trigger it?
• On a seller note, is early repayment allowed, and on what terms?