Your small business means everything, especially during these uncertain economic times.

This is why it is essential for your business to obtain the best type of Small Business Loan to keep your business thriving, whether it is a variable or fixed rate loan.

If you are a new business owner looking to apply for a business loan, you may have wondered if small business loans are fixed or variable. We’re here to answer that for you!

Both fixed and variable have their advantages, here are two popular types of small business loans to help you make your decision.

Know Your Options When Securing Business Funding

When submitting your application for a small business loan, you choose between two options: variable or fixed rate.

Variable rates start at a slow rate but change over time due to market fluctuations in the future.

For example, if a recession were to occur, small business loan interest rates may lower, giving you an advantage. On the other hand, if the economy is thriving and interest rates are increasing, your small business loan rate may also increase. (Interest rates follow the Certificate of Deposit Rate or Bank Bill Swap Rate index.)

Fixed rates tend to be more popular, due to the fact that the current rate is locked in today and will carry a constant rate throughout your pay period, no matter the condition of the economy. Fixed rates are typically from 10 to 50 years, with the most common term being 30 years. If interest rates do increase, you will not be affected, but you also will not benefit if the rates become lower.

Whether it is  Small Business Loan or Asset-Based, interest rates affect how you do business right now and in the future. As a business owner, there are certain expenses you cannot control, like utilities and healthcare. However, you can manage your interest rate expense over the period you choose.

Variable Rate Advantages

When choosing a variable rate on your small business loan application, the initial interest rate presented is lower than the market interest on fixed rate loans.

In the short-term, your payments may be less than the average loan, which gives you an advantage. Especially if you are applying for a small business start-up loan.

Variable rate loans may also allow you to borrow money despite having a less than stellar credit score.

Business owners willing to risk more in a short amount of time may benefit the most with variable rate loans. Keep in mind, there is the chance of rising interest rates in the future, if the economy thrives. If interest rates increase, your small business loan’s interest rate will also increase.

During times of uncertainty in the economy with rising unemployment, like during the Great Recession or Covid-19 Pandemic, interest rates decreased as economic distress occurred. Opportunities for low-interest rate loans, such as the  Paycheck Protection Program (PPP) became available to business owners in immediate need of financing. The interest rate for the PPP loan was 1%, lower than the average small business loan interest rate.

Overall, small business loans with a variable rate have their advantages. These advantages depend on the economic climate, risks involved, and the loan term period.

Fixed Rate Advantages

There is a reason most small business loans come with a fixed rate. The fixed rate gives business owners peace of mind when it comes to their payments, knowing they will not change over time.

When you apply for a small business loan and choose a fixed rate, the lender will give you an interest rate based on your criteria and the market rate. The payments will remain the same for the period you select.

Business owners are able to keep track and know exactly how much they will be paying, allowing flexibility with their future cash flow.

If the economy is booming and interest rates are increasing, you will not have to worry about fluctuations in your payments. If the economy is not doing well and interest rates are lower, you will not be able to take advantage of these interest rates and may pay higher than the average interest rate at that given time.

Due to high payments, small business loans with fixed rates may be harder to obtain depending on your qualifications.

Having the ability to plan for other financial commitments due to a fixed rate and consistent monthly payments is beneficial for business owners who take their budget into high consideration.

Is There an Average Interest Rate?

The average small business loan rate is between 5.5% and 7.5%. Depending on your finances, credit score, and other factors, it may be higher.

The Small Business Administration (SBA) determines the rates along with the Federal Reserve and the lender. Whether your business loan has a fixed rate or variable will be determined by your negotiations with the lender.

Consider using a small business loan calculator to estimate monthly payments by entering rates and the amount borrowed.

How Do I Know Which Option I Qualify For?

Who qualifies for a small business loan?

Lenders may require several documents to determine your qualifications, such as:

• Balance Sheet
• Income Statements
• All bank statements (business and personal)
• Leases for operations under the business
• Articles of Incorporation
• Tax returns (business and personal)

One requirement that can affect your small business loan immensely is your credit score.

Your credit score, paired with your current finances, will determine if a variable or fixed rate small business loan is right for you. Your lender may also vary and offer different rates.

Someone with a lower credit score who wants to get their business started as soon as possible, may choose a variable rate to jumpstart their endeavors. They would rather take the risk now with lower rates and worry about possible consequences later.

If you’re more prepared, have your finances in order, and do not want to worry about future payment changes, a fixed rate may be the best financing option for you.

Need Help Applying for a Variable or Fixed Rate Loan?

If you aren’t sure about choosing a fixed or variable small business loan, apply using our 15 Second Application to speak with a financing advisor within minutes.  Our financing advisors are ready to help you find the best financing option for you and answer any questions you may have along the way.