Is a small business loan a variable or fixed rate? Rate offers differ by creditor. Both have their pros and cons. Variable rates depend on market forces.

As they say, to make money, you have to spend money. And anyone running a small business that keeps a tight cash flow knows that very well. Operational expenses can easily become very overwhelming. Hence, small business loans are part and parcel of an entrepreneur’s life.

One of the deciding factors in availing of a small business loan is the interest rates. So your next concern would be, is a small business loan fixed or variable? The answer is here in this article, plus a whole lot more, which hopefully can help you decide between a fixed interest rate loan and a variable rate loan.

Here are some terms you will encounter.


It is the cost of borrowing money or a loan, usually represented by a certain percentage of the loan amount.

Small business loan

It is a type of small business financing used for a particular purpose such as equipment purchase, additional credit line, factoring invoices, among others.

Compound interest

Interest is computed on the outstanding balance from the loan principal plus its accrued interest.

Base rate

A base rate is the minimum interest rate charge is set by the bank or financial institution. Sometimes, the government pegs it at a reduced rate to stimulate growth.

Prime rate

Also referred to as prime lending rate, the prime rate is interest granted by major banks for their most creditworthy borrowers.


The lender could be a person, a group, or a company that is the source of funds for the loan.

SBA loan

It is a type of business loan, a portion of which is guaranteed by the US Small Business Administration (SBA).

What are fixed-rate loans?

Fixed-rate loans are loans whose repayment is computed based on a single rate throughout their duration. Regardless of market upheavals, the fixed interest rates charged to the loan will not change.

Pros and cons of fixed-rate loans

Pros: Your monthly repayment amount will remain the same so that you can set a definite budget during your loan term. At the same time, your repayment terms will not be affected by sudden spikes in market rates, allowing you to protect your business.

Cons: When base rates go down, you don’t benefit from it as your rate is fixed. Also, comparatively speaking, fixed rates are usually quoted higher than variable rates. For example, your fixed rate is 11%, while the variable rate is 9%.

What are variable rate loans?

Variable-rate loans mean their interest rate can change anytime during the repayment period. The behavior of financial markets that causes this change is tied to the prime rate, which the Federal Reserve determines. Hence your interest could go up or down. Essentially, borrowing money with a variable rate is like investing in the stock market; only you would want the rates below, or else you will pay more for your loan. The rate can also stay the same given an economic growth at a reasonable pace and manageable inflation.

Pros and cons of variable rate loans

Pros: The borrower has the opportunity to less monthly repayments than he is used to when the base rate goes down. Hence, if your current interest rate is 8 percent and there is a reduction of 0.5%, it becomes 7.5%. And depending on the market where your loan continued to enjoy the lower interest rates, it can significantly reduce your overall cost for the entire loan duration.

Cons: The uncertainty of the market may bring about higher interest rates such that the borrower ends up having a higher monthly payment, which can throw off their budget.

Is a small business loan a variable or fixed rate?

Small Business Loan Rates

Whether fixed or variable, interest rates stay within a range of values across banks, lenders, credit unions, and financial institutions. Generally, though, you should not only ask for the interest rate but also the APR as this percentage will give an estimate of your total cost.

As of this writing, term loans range from 4% to 6%. The line of credit is between 5% to 10%, and SBA microloans charge anywhere between 5% and 8% APR.

For other types of small business loans like merchant cash advances, banks prefer to quote them in factor rates over APRs. A factor rate is used to compute the total small business’s monthly payments by multiplying it to the cash advance amount.

What fees are involved aside from interest rates?

The borrower shoulders other fees which comprise the APR when securing a small business loan. An initiation fee will cover the administrative cost of processing your loan application. An underwriting fee is paid to the underwriters responsible for reviewing your documents. Closing fees apply to real estate appraisal, packaging, or the valuation of your business. Aside from that, there’s a guarantee fee for SBA loans that the borrower shoulders to defray the SBA program cost. Incidental fees would include late payment and prepayment charges.

What else should you ask your lender when applying for a small business loan?

Given that your loan request is granted, it is worthwhile to ask the following questions to your lender aside from interest rates.

  1. Are there incentives if I pay earlier than my due date or if I pay several months’ worth of repayments in advance?
  2. How soon do I begin with the monthly repayments? What payment channels do you accept?
  3. What type of business loan do you recommend for my business needs?
  4. What is the lowest interest rate you can offer me? APR? What fees comprise this APR?
  5. Can I change my monthly due date at any point in the loan term?
  6. Can I talk to some of your previous borrowers?

Final thoughts

Is a small business loan fixed or variable? You now know the answers to this question. When choosing between the two rate plans, remember to consider your cash flow, preference, loan term, risk tolerance, and business goals.

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