The Cost of Early Settlement
A significant advantage of Private Funding is flexibility. Should your business secure an unexpected influx of capital, you may wish to close your Cheque Basis funding account early. Foreclosure and prepayment charges address the financial impact of this early settlement.
These foreclosure charges generally fall between 2% to 5% on the outstanding principal balance. The specific percentage within this 2% to 5% band is determined by how early in the funding lifecycle the settlement is requested, and the terms set out in your original private funding agreement.
Why Does the 2% to 5% Charge Exist?
When private funding is extended, the capital allocation is modeled on a specific return profile over an agreed timeline. Foreclosing early disrupts this model. The 2% to 5% charge helps offset the administrative costs of recalculating and closing the account, as well as the loss of anticipated interest on the cheque basis structure.
Navigating Prepayment Policies
Some private funding agreements include a lock-in period, during which foreclosure is either restricted or incurs the maximum 5% charge. Conversely, settling the cheque basis account closer to its natural conclusion typically incurs the minimum 2% fee.
We encourage clients to contact our settlement desk before deciding to prepay. A complete calculation of the remaining balance, adjusted for the 2% to 5% foreclosure charge, will be provided, ensuring that you can make an informed financial decision regarding your private funding account closure.