Fixed vs. Variable: Understanding Loan Interest Rates

What is the Interest Rate on a Business Loan?

An interest rate is the price you pay to borrow money from a lender. It’s a percentage of your loan amount (a.k.a., the principal) that’s due over a certain period of time. 

Interest rates come in different types and sizes. The interest rate that a lender offers you could be above or below the average business loan interest rate based on factors such as:

• Lender: Different lenders may have different interest rate ranges that they offer to qualified borrowers. As a result, the lender you choose to work with can have a meaningful influence on your interest rate. 
• Loan Type: The type of business loan you choose can also impact the price your business pays for financing. SBA loans, for example, feature a maximum interest rate on guaranteed loans. Business loan interest rates on other types of loans, meanwhile, might not come with a cap.
• Credit: Your credit score (both personal and business) could affect your interest rate too. You may still be able to find business loans for bad credit, but your interest rate will likely be higher with this type of financing. 
• Financial Situation: Lenders will evaluate your level of risk when you apply for financing. Your financial situation (including business revenue, cash flow, and more) may play a role in that evaluation process. Solid financial figures could possibly help you qualify for more attractive business loan interest rates and loan terms.

Collateral: Putting up collateral is another way to potentially reduce risk in the eyes of lenders. Whether or not you wish to secure a loan with collateral (and the type of collateral you have to offer) can affect the interest rates lenders may offer you. If you prefer unsecured small business loans, there are also plenty of options available. 

Is a Small Business Loan a Fixed or Variable Interest Rate? 

The terms of your business loan may include one of two types of interest rates: fixed or variable. As you research business loan options, it’s important to understand the difference between these interest rate options to find the solution that’s best for your business needs. 

Differences and Benefits of Fixed and Variable Interest Rates

Lenders make money by charging interest and sometimes loan fees when businesses borrow money. Fixed and variable interest represent two different ways to pay a lender. 

Fixed Interest Rates

Fixed interest rates do not change over time. As a result, they can be easy to plan for in terms of your monthly business budget. 

From your first payment to your last, the percentage of interest you pay is set in stone. And fixed interest rate installment loans can offer you a predictable payment schedule as well. 

Variable Interest Rates

A variable interest rate has the ability to move up and down with the market. In some cases, market fluctuations could save you money when you have a variable interest rate. But there’s always a chance that your interest rate could increase—costing you more money in the long run. 

If your variable interest rate adjusts, your monthly loan payment amount may change. The nature of these loans can make it harder to plan ahead in terms of monthly business expenses. However, you might be able to lock in a loan with a lower starting interest rate (not guaranteed) if you’re comfortable with the risk. 

Is a Fixed or Variable Interest Rate Best for Your Business? 

There are many factors to weigh when deciding whether a fixed or variable interest rate is best for your business. Starting interest rates, market predictions, and your tolerance for risk are all important considerations. 

A lower initial rate that could save you money now might make a variable interest rate appealing. Yet be sure to think about how a higher interest rate might affect you if an increase occurs in the future. If you could easily afford a higher monthly payment should the rate increase, the risk of a variable interest rate could make sense. But if a higher interest rate and monthly payment increase would strain your budget, it may be better to opt for a fixed rate that’s easy to plan for over time.

How to Compare Interest Rates on Business Loans

When you need financing for your business, it’s wise to compare multiple business loan options to make sure you’re getting the best deal available. As you shop around, consider using a loan calculator to help you compare the cost of your loan—both on a monthly basis and in terms of overall interest. 

Of course, it’s important to proceed with caution when you’re shopping for the best interest rates too. Many loan applications require a hard credit inquiry—a type of personal credit check that could damage your credit score. 

An alternative way to shop for loan rates without putting your credit score in jeopardy is to use a lending marketplace like Lendio. Lendio works with over 75 lenders to help you review a variety of funding options for your business. Best of all, all of these financing options are available through a single online application that doesn’t impact your credit score.

Current Business Financing  Rates

The average interest rate for business financing can change over time. Below is a look at the current interest rates you may encounter when applying for funding. 

Understanding the financing terms a lender has to offer is important during the finance shopping process—especially where fixed and variable interest rates are concerned. What looks like a great deal on the surface might not be worth the risk in the long run if a changing interest rate could put you in a financial bind. 

Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.