Back to blog
Woman checking a page about interest rates on laptop. Featured image for “Is a Small Business Loan Fixed or Variable?”

Is a Small Business Loan Fixed or Variable?

Is a small business loan fixed or variable? This is one of the questions you’ll have to grapple with when securing financing for your small business venture, be it a restaurant or a daycare center.

In this article, we’ll explore how fixed and variable small business loans work (along with their pros and cons). We’ll also give you a list of factors that will help determine which one is right for you. Let’s get started!

How Fixed-Rate Business Loans Work

Fixed-rate business loans offer predictability in your monthly expenses. When you secure a fixed-rate loan, the interest rate remains the same throughout the loan term. This means your monthly payments also stay constant, making it easier to budget and plan for expenses.

Pros of Fixed-Rate Business Loans

Predictable Monthly Payments

One significant advantage of fixed-rate business loans is that your monthly payments remain constant throughout the loan term. This predictability makes it easier to plan and budget for your business expenses. You won’t have to worry about sudden spikes in your monthly payments due to interest rate fluctuations.

Stability in Interest Costs

With a fixed-rate loan, you lock in an interest rate that won’t change. This stability can protect your business from rising interest rates in the future, ensuring that your borrowing costs stay manageable over time. It provides peace of mind, knowing that your interest expenses won’t surprise you.

Easier Financial Planning

Fixed-rate loans simplify financial planning for your business. You can accurately forecast your financial obligations and allocate resources efficiently, helping you make long-term growth strategies and investments with confidence.

Cons of Fixed-Rate Business Loans

Potentially Higher Initial Rates

Fixed-rate loans tend to have slightly higher initial interest rates compared to variable-rate loans. This means that, initially, you may pay more in interest costs.

Less Flexibility in Rate Changes

While fixed-rate loans shield you from rising interest rates, they also prevent you from benefiting if interest rates decrease. You’re locked into your initial rate for the entire loan term, potentially missing out on savings.

See also  Applying for a Loan Online Vs In Person: Which is Better?

Early Repayment Penalties

Some fixed-rate loans come with prepayment penalties if you decide to pay off the loan early. This can be a disadvantage if your business experiences rapid growth and you want to reduce debt quickly.

How Variable-Rate Business Loans Work

On the other hand, variable-rate business loans provide flexibility, although it may also come with some uncertainty. With these loans, your interest rate can change periodically based on market conditions. While you might enjoy lower initial rates, your monthly payments can fluctuate, making budgeting a bit trickier.

Pros of Variable-Rate Business Loans

Potentially Lower Initial Rates

One significant advantage of variable-rate loans is the possibility of lower initial interest rates compared to fixed-rate loans. This can translate into lower monthly payments and reduced borrowing costs at the outset.

Opportunity for Lower Overall Interest Costs

Variable-rate loans can lead to significant savings if interest rates decrease over time. As market rates fluctuate, your loan’s interest rate can adjust downwards, resulting in reduced overall interest expenses.

Flexibility in Rate Changes

Variable-rate loans offer flexibility, allowing your interest rate to change based on market conditions. If you anticipate falling interest rates in the future, a variable-rate loan may provide potential cost savings.

Cons of Variable-Rate Business Loans

Uncertainty in Monthly Payments

The primary drawback of variable-rate loans is the uncertainty in your monthly payments. Since your interest rate can change, your monthly payments may fluctuate, making it challenging to budget for your business expenses.

Risk of Interest Rate Hikes

While both fixed and variable small business loans offer the potential for lower rates, the latter also carry the risk of interest rate increases. If market rates rise, your loan’s interest rate and monthly payments could go up, potentially straining your finances.

See also  Employee Retention Credit: What it is and How it Works

Difficulty in Long-Term Planning

Variable-rate loans can complicate long-term financial planning. The unpredictable nature of interest rate changes makes it harder to forecast your future borrowing costs, which may affect your business’s ability to make strategic decisions.

Which One is Better for You? Factors to Consider

Choosing between fixed and variable small business loans is a critical decision that can significantly impact your long-term financial stability and the cost of borrowing. So the next time you’re trying to figure out “Is a small business loan fixed or variable?”, consider these five essential factors:

Risk Tolerance

Fixed-rate loans offer stability, making them suitable for businesses with low-risk tolerance. You can predict monthly payments, which helps with budgeting and financial planning.

Variable-rate loans are better suited for businesses comfortable with some risk. Monthly payments can fluctuate, so assess whether your business can handle potential rate increases.

Current Interest Rates

Keep an eye on current market interest rates. If rates are relatively low, fixed-rate loans may be attractive, as you can lock in a favorable rate. If rates are high, variable-rate loans might provide initial cost savings.

Loan Duration

Consider the length of your loan term. Fixed-rate loans are ideal for longer-term loans, as they provide stability over an extended period. Short-term loans may benefit from variable rates to capitalize on lower initial rates.

Financial Stability

Evaluate your business’s financial health. If your cash flow is steady and you need certainty in expenses, fixed-rate loans are a safer choice. However, if your business can handle fluctuations and wants to maximize potential savings, variable rates may be suitable.

Prepayment Penalties

Check the terms of the loan for prepayment penalties. Fixed-rate loans may have penalties for early repayment, which can limit your flexibility. Variable-rate loans often have fewer or no prepayment penalties, allowing you to pay off the loan faster if needed.

See also  The Ultimate Guide to Improving Your Small Business’ Cash Flow


Ultimately, the choice between fixed and variable small business loans depends on your unique circumstances and preferences. Know how each works, consider the factors listed above carefully, and consult professional lenders if necessary. That way, the next time you find yourself asking “Is a small business loan fixed or variable?”, you can select the option that aligns best with your business’s goals and risk tolerance.

Frequently Asked Questions

What is the difference between a fixed and variable business loan?

The key difference between a fixed and variable business loan is in the interest rate structure. A fixed business loan has a stable interest rate throughout the loan term, ensuring consistent monthly payments. Meanwhile, a variable business loan’s interest rate can fluctuate over time, leading to potential changes in monthly payments.

What is a fixed and variable loan?

A fixed loan, whether for personal or business purposes, has an interest rate that remains constant over the loan duration, providing predictability. In contrast, a variable loan, also known as an adjustable-rate loan, features an interest rate that can change periodically based on market conditions, introducing variability in monthly payments.

Is a small business loan fixed or variable?

Whether a small business loan is fixed or variable depends on the terms and type of loan you choose. Small business loans can come in both fixed-rate and variable-rate variants, allowing business owners to select the option that best aligns with their financial goals and risk tolerance.

Are most business loans fixed or variable?

The availability and popularity of fixed or variable business loans can vary, influenced by market conditions and lending institutions. In some cases, fixed-rate business loans may be more common due to stability. In others, variable-rate loans might be favored for their potential cost savings.

What to read next

What is Asset Financing: Overview, Importance, and Types

Asset financing can seem complicated, but it’s quite simple. But, the jargon used in the industry can be confusing, especially as some asset financing methods have terms that sound identical, abbreviated, or used interchangeably.

  • by Cheyne Pierce
  • July 16, 2019

Is Bookkeeping Hard? Everything You Need to Know

Is bookkeeping hard? The short answer is no. It’s a common misconception that you need a formal education to be a bookkeeper, but anyone with solid math skills and the right resources can do it.

  • by Nathan Armstrong
  • August 1, 2022

Let's talk small business.

There’s the 1West way to get smart financing fast — and there’s everything else. We believe in your small business and we believe in our approach. No nonsense. No surprises. Just expert guidance from start to finish.

Find out what's next