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Fixed vs Variable Rate Business Loans

Are Small Business Loans Fixed Rate or Variable Rate?
Lauren Ward
Lauren WardUpdated November 24, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Small business owners who take out a business loan will either receive a fixed or variable interest rate loan. Each business has unique needs, so the type of loan that is best depends on your business and monthly cash flow. Keep reading to learn the difference between fixed and variable rate small business loans, pros and cons of each, and the factors that can help you determine which could be better for your small business. 

What Are Small Business Loans? 

A small business loan is money that is borrowed from a bank, credit union, or lender. The owner intends to use the money for his or her business, and the funds are typically used for things like:
  • Working capital
  • Real estate
  • Inventory
  • Business acquisitions
  • Renovations
  • Asset acquisition
There are various types of small business loans on the market that owners can choose from, including term loans, SBA loans, business lines of credit, equipment financing, merchant cash advances, and more. Another thing that needs to be considered is the type of interest you want, whether that’s a fixed rate or a variable one. Most loans automatically come with one or the other, so you’ll want to factor that in when deciding on what type of business loan you want.Recommended: Guide to Getting a First-Time Business Loan

What Fixed Interest Rate Loans Are

Pros of Fixed Interest Rate LoansCons of Fixed Rate Interest Loans
Predictable monthly paymentFixed rate small business loans typically have higher interest rates than variable interest rate loans
Easy to budget forIf rates go down, borrowers must refinance to access the lower interest rates
Not affected by market changes
A fixed interest rate loan comes with an interest rate that does not change throughout the life of the loan. Once the loan is processed, monthly payments are the same until the loan is paid off. This means borrowers can easily budget for a fixed rate loan because they know exactly how much each payment is going to be. They also know how much they are going to pay for the loan overall. The downside to a fixed rate loan is that if the market changes and banks start loaning at lower interest rates, borrowers with a fixed rate loan won’t see any changes. However, the flip side of this is that if rates go up, fixed rate borrowers are protected against big market swings. 

Fixed Interest Rate Loan Example 

Let’s assume you borrow $50,000 to purchase an additional asset for your company. The repayment period is five years and the interest rate is 6%. Your monthly payment would be $966.64 for the life of the loan, and you would pay $7,998.40 in interest. The total cost of the loan would be $57,998.40 (not including any fees).

What Variable Interest Rate Loans Are

Pros of Variable Interest Rate LoansCons of Variable Interest Rate Loans
When rates go down, borrowers who took out a variable interest rate loan typically see lower ratesWhen rates go up, monthly payments go up
Rates usually start lower than fixed interest rate loansCan make budgeting difficult
When variable interest rate loans fluctuate, they mirror market changes, which means a loan with this type of interest may have different monthly payments from one month to the next. However, in a stable economy, the payment amounts aren’t usually that much different from one another.There are a few downsides to choosing a variable interest rate loan — the biggest one being that when rates go up, your payments increase. If your business’s cash flow is tight, this can make budgeting very difficult. Plus, with a variable-interest model, you won’t know what the total cost of your loan is until you’re done making payments. With a fixed interest rate, you always know exactly what you're paying month-to-month and the total cost of the loan. 

Types of Variable Business Loans 

Types of small business loans that may come with variable rates include:
  • Business lines of credit
  • Invoice financing
  • SBA loans
  • Merchant cash advances
  • Equipment loans

Variable Interest Rate Loan Example 

The previous fixed-rate loan example saw the borrower take out a $50,000 loan with a five-year repayment period and a 6% interest rate. Overall, that borrower paid $7,998.40 in interest. If the borrower were to choose a variable rate interest loan instead, he or she might be offered a 5% interest rate, which could go up or down throughout the repayment period. Therefore, while this borrower might save money on the loan, it is not a guarantee. Recommended: Average Business Loan Interest Rates

3 Factors to Consider When Choosing the Best Loan for Your Business 

When choosing whether to go with a fixed or variable interest rate loan, there are many factors you should consider before deciding.

1. The Amount of Risk

The first thing you should think about is how much of a risk you’re willing to take. Most businesses want predictable monthly expenses and are willing to miss out on “historic lows” because they don’t like the idea of being vulnerable to market fluctuations. Because of this, many business owners often choose a loan with a fixed rate. 

2. Your Monthly Budget

On the other hand, businesses that have some breathing room in their monthly budgets and can take on a little risk may not like the idea of missing out on low rates. By choosing a variable interest rate loan, these owners could potentially save money in interest. They may not know exactly how much they’ll spend month to month, but their budget allows for some fluctuations. If the budget is tight, though, and there’s little wiggle room, a fixed rate loan will probably be the better option.

3. The Type of Loan

Certain types of small business loans come with fixed rates, such as short-term loans, whereas others come with variable rates, such as business lines of credit. If you are set on a specific type of loan, you may not have a choice in whether or not you receive a fixed or a variable interest rate.

Compare Small Business Loan Terms 

Both fixed- and variable-rate small business loans have advantages and disadvantages. Knowing your budget, financial goals, and risk comfort will help guide you when it comes to deciding.When applying for a small business loan, Lantern by SoFi can help you find the best deal for your situation. With just a single application, you’ll receive an offer from a top small business lender, all with no obligation to you.

Frequently Asked Questions

Is it faster to get a fixed or variable rate business loan?
Which is easier to get between variable and fixed interest small business loans?
Are fixed or variable interest rate business loans typically cheaper?
Do small business loans have a fixed interest rate?
How do you tell if a loan is fixed or variable?
Photo credit: iStock/Talaj

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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