Small business loans come with fixed and variable interest rates. Fixed-rate loans have a constant rate throughout their term, while variable-rate loans tend to fluctuate based on other market factors. When you’re considering whether to get a small business loan that is fixed or variable, it’s important to understand the advantages and disadvantages of each type. Depending on your financing needs and risk tolerance, you might want to consider getting a small business loan that has one type of interest rate rather than the other. Let’s take a closer look at both types of rates and which might be right for you.
What is a fixed-rate small business loan?
A fixed-rate small business loan has a constant interest rate that stays the same throughout the life of the loan. This means that the monthly payments and total cost of the loan won’t change even if the general interest rate in the economy rises or falls. A fixed-rate small business loan can be helpful for borrowers who don’t want to have to worry about their monthly payments increasing due to a change in the broader economy. Fixed-rate loans are typically used for larger financing needs, and they’re often found in business loans that are over $100,000. Fixed-rate loans can also come in several different types, depending on the lender. You may be able to get a fixed-rate loan that’s fixed for a term of up to 10 years.
What is a variable-rate small business loan?
A variable-rate small business loan has an interest rate that is determined by a number of factors, such as general market conditions and the borrower’s credit score. The variable rate for a business loan may change during the course of the loan and affect the monthly payments and total paid back over the life of the loan. The general rate of inflation is a major factor for variable-rate small business loans, and it can cause the interest rate to go up. This can impact your regular payments and end up costing you more over time. Variable-rate business loans are often used for shorter-term financing needs and can range in scale from $5,000 to several hundred thousand dollars. This type of business loan tends to have lower interest rates compared to fixed-rate loans,. That’s because the risk of the borrower defaulting on the loan is higher.
Advantages of a fixed-rate small business loan
- You know exactly what your payments will be. A fixed-rate small business loan allows you to budget your cash flow and make sure your payments are sufficient to cover the cost of the loan over the term of the loan. With a variable-rate small business loan, the monthly payments may fluctuate throughout the life of the loan. This can make it more difficult to plan for the future.
- Lower monthly payment: The fixed rate of a small business loan means you’ll have a lower monthly payment than you would with a variable-rate loan. This can make it easier to pay back your loan on time and can help you manage cash flow better.
- Steady cash flow: If you have a fixed-rate small business loan, you’ll know exactly how much money you’ll need to make each month for your payments. This can help you plan for expenses in future years.
- No risk of rising payments: With a fixed-rate small business loan, you won’t have to worry about your payments increasing if the general interest rate in the economy rises.
Disadvantages of a fixed-rate small business loan
- Higher interest rate: A major downside of fixed-rate small business loans is that they often come with a higher interest rate than variable-rate loans. While this might not be a big deal if you only need a small amount of money, it can be a significant issue if you need a significant amount of money.
- No refinance options: Another disadvantage of a fixed-rate small business loan is that you can’t refinance the loan to get a lower interest rate if the interest rates in the economy fall. This means you’ll end up paying more in interest over the life of the loan.
- Larger monthly payments: While fixed-rate small business loans have lower monthly payments than variable-rate loans, they often require you to pay a higher amount up front.
Advantages of a variable-rate small business loan
- Lower up-front payment: Variable-rate small business loans often have a lower up-front payment amount than fixed-rate loans. This can make it easier to get the financing you need, even if you don’t have a large amount of savings in the bank.
- Lower interest rate: The lower risk involved with a variable-rate small business loan means you’ll usually get a lower interest rate than a fixed-rate loan would have. This can save you money over the life of the loan.
- Easier to refinance: If interest rates in the broader economy fall, you can often refinance a variable-rate small business loan to get a lower interest rate. This can help you get the most out of your financing and save you money over the long term.
Disadvantages of a variable-rate small business loan
- Riskier financing: Borrowers with lower credit scores are often offered variable-rate small business loans. These loans are riskier for the lender, which means it charges a higher interest rate to account for that risk.
- Rising payments: If the general interest rate in the economy goes up, you might see your monthly payments increase. This can make it challenging to stay on top of your cash flow, especially if you have a lot of fixed expenses like a mortgage payment.
- More difficult to plan: While fixed-rate small business loans can come with long-term financing terms, variable-rate small business loans often have shorter terms. This can make it more challenging to plan for future expenses, such as a new hire or expansion.
When should you get a fixed rate?
Depending on your financial situation and the size of your loan, a fixed-rate small business loan might be a good choice for you. These types of loans are often found in larger amounts. They make sense if you need a fixed amount of money each month. Fixed-rate loans are also a great choice if you want to lock in a lower interest rate. You might need to put down some collateral to get one.
When should you get a variable rate?
Variable-rate small business loans are usually under $250,000, and they come with lower interest rates than fixed-rate loans. If you need a smaller amount of money and want to get the best interest rate possible. Variable-rate loans are often used for shorter-term financing needs, and they don’t require collateral like a fixed-rate loan might.