Small businesses require funds to meet different business operating expenses and capture the scope of opportunities and growth. It is difficult for small businesses to meet the capital requirements after covering the business operating expenses. Thus, most small businesses depend on different types of financing to cover business capital requirements.[1]  Small business owners can take short-term and long-term financing for different business purposes.

Financing contracts include a financing repayment period within which the accrued financing principal and profit must be repaid. This load repayment period is the financing settlement period. When financing are paid before the stated financing settlement period, it is called early settlement of the financing.

A financing repayment before its due date has some key benefits such as the below:

– Total cost savings:

Financing principal and profit are calculated based on the entire financing settlement period. If the business owner repays earlier than the due date, a part of the profit will be waived[2]. The sooner the debt will be paid, the less profit the business owner will pay. For example, if a small business owner has an outstanding financing of SAR50,000 at a 7% annual profit rate and a financing term of 1 year, the financing amortization will be like in the below table:

* Amount Thousands SAR

If the small business owner repays the financing after 1 year, the total profit paid will be $1916. In this case, If the small business owner repays the financing after 2 months, the total profit paid will be (SAR290+SAR268)= SAR560. Thus, there is a saving of (SAR1916-SAR560)=SAR1356. Therefore, small businesses can save money by paying less profit if the financing is settled earlier than its due date.

– Improved credit score:

By paying off financing earlier than the due date, the business owner can improve their credit score since it reduces the risk of default. The early settlement indicates a responsible borrower and thus awarded higher credibility.

– Opportunity for new financing:

Along with a higher credit score, early financing settlement helps to improve the debt-to-equity ratio of a business. Thus, with the early settlement, the borrowing power and credibility of the business increase which helps to get new financing whenever needed.

– Alternate use of money:

Through the early settlement, the business owner saves money from less profit payment and free up business finances to use in business rather than financing installment. The business owner can invest in business growth and plan for long-term goals without worrying about debt payments.

– Avoid the risk of default:

If the business owner delays the repayment of the financing, it increases the risk of financing default that might lead to business bankruptcy. Since the business life cycle is longer than the financing settlement period, the business will have to pay more profit which will increase cost and risk of default. Thus, by repaying the financing earlier, the business can reduce its debt and default risk.

– Avoid late payment fees and obligations:

If the monthly installments of the financing are not made in time and the entire financing is not repaid within the settlement date, the business may face significant late payment fees and legal charges that can increase business expenses. Moreover, the management of financing installments requires time and labor. Thus, early financing settlement can help to avoid expenses in late payment fees and legal charges.

Small businesses are required to manage their business finances efficiently to reduce the cost and risk of bankruptcy. In this case, through early settlement, the company can improve their credibility, reduce financing costs, and achieve higher business financial strength. [3] The most common financial instrument for small business owners is invoice financing especially from those financial institutions that allow early settlement[4]  without any extra charges. For example, Lendo is a financing company that provides invoice financing to small and medium businesses, and it does not charge fees for early settlement. Thus, Lendo helps small businesses to enjoy the benefits of early settlement.

Lendo is a financing company that helps SMEs convert pending accounts receivables to cash right away. Lendo is the first financial institution to introduce a peer-to-peer (P2P) invoice financing platform in Saudi Arabia starting from 0.8 per month for small and medium-sized enterprises (SMEs). Small business owners can ask Lendo for financing advice and get expert suggestions on how to improve their financial position, optimize profits and strengthen financial condition. For more information about Lendo and its services, visit the website here.