As you work to secure financing for your small business, there is a multitude of considerations that go into your decision. From loan amount to collateral requirements and fees, not all loans are created equal. Business loan interest rates are one of the most common hang-ups when it comes to small business loans, and many questions can arise around this. Determining the rate depends on various factors.
At Live Oak, we make a commitment to guide our small business loan customers through the lending process. When it comes to business loan interest rates, we’re breaking down the pros and cons of fixed interest rates vs. variable interest rates, and the importance of leaning on your seasoned lender to help you make the right decisions for your business.
Fixed Interest Rates
- What is it? With a fixed interest rate, your monthly payment and interest rate do not change. You’re essentially locked into that same amount for the life of the loan, regardless of whether the base rate goes up or down.
- What are the pros? There are several benefits to selecting a fixed interest rate, namely knowing that your monthly payment will remain the same. This can help with long-term budgeting and planning. Additionally, if the interest rate does begin to rise, you’ll be locked into the lower amount, potentially saving you some cash.
- What are the cons? If the interest rate goes down, you won’t be able to reap the benefits of that. Also, the interest rate on a fixed rate is generally higher than the variable rate.
Variable Interest Rates
- What is it? Variable rates fluctuate over time, depending on the established prime rate. These rates can go up or down over time, meaning your monthly payment will change over the life of the loan.
- What are the pros? Quite often, the rate for variable rate loans is lower than a fixed rate. The prime rate is determined by the Federal Reserve Board and can often stay the same for years or change sporadically. Your initial rate may change over time, but it could often start out low enough to counteract the higher rate down the road. If the base rate goes down, you’ll enjoy lower monthly payments and won’t be locked into a single rate, like the fixed rate approach.
- What are the cons? Your monthly payment and rate could go up, depending on economic circumstances, including inflation. This makes it more challenging to budget and predict operational expenses, which would impact your cash flow.
Work with your lender to decide which business loan interest rate option is best suited for your small business and your long-term goals. If you’d like to explore your small business loan options with one of our loan specialists, you can get started here.