Fixed vs Variable Interest Rates: Which is The Best for Business Loan?

Did you know that nearly 60% of small businesses in Australia struggle with cash flow issues?

This startling statistic highlights the critical importance of making informed decisions when it comes to business loans.

One of the most crucial choices you'll face is between fixed and variable interest rates.

Let's dive into this topic and help you make the best decision for your business.

Understanding Fixed And Variable Interest Rates

Before we compare the two options, let's clarify what each term means:

1. Fixed Interest Rate: This rate remains constant throughout the loan term, regardless of market changes.

2. Variable Interest Rate: This rate can change over time, usually in response to market conditions or changes in the Reserve Bank of Australia's (RBA) cash rate.

Comparing Fixed And Variable Interest Rates

To help you visualise the differences, here's a comparison table:

Feature	Fixed Interest Rate	Variable Interest Rate
Predictability	High	Low
Initial Rate	Often higher	Usually lower
Risk of Rate Increase	None	Yes
Benefit from Rate Decrease	No	Yes
Suitable for	Long-term planning	Short-term flexibility
Early Repayment Fees	Often higher	Generally lower

Advantages Of Fixed Interest Rates

1. Predictable Repayments: Because interest is fixed, your repayments do not change over the life of the loan. This can be incredibly useful for budgeting and managing cash flows.

2. Protection from Rate Rises: If interest rates rise at any time, then your interest rates on the loan will not be affected. This can be very assuring in uncertain times.

3. Easier Long-term Planning: Because you know exactly how much you will need to pay every month, it facilitates making long-term plans and using your resources accordingly.

Disadvantages Of Fixed Interest Rates

1. Higher Initial Rates: The fixed rates usually start off higher than the variable rates in the initial years of life of a loan.

2. Missing Rate Decreases: You can't take advantage of lower repayments in case market rates decline.

3. Higher Break Costs Possible: In case you wish to repay the loan ahead of schedule, you could be liable to pay substantial break costs.

Advantages Of Variable Interest Rates

1. Lower Initial Rates: Variable rates often start lower than fixed rates, which can mean lower initial repayments.

2. Potential for Rate Decreases: If market rates fall, your repayments could decrease, saving you money.

3. More Flexibility: Variable rate loans often have fewer restrictions and lower fees for early repayment or extra repayments.

Disadvantages Of Variable Interest Rates

1. Unpredictable Repayments: Your repayments can change, making budgeting more challenging.

2. Risk of Rate Increases: If rates rise, your repayments will increase, potentially putting strain on your cash flow.

3. Difficulty in Long-term Planning: The uncertainty of future repayment amounts can complicate long-term financial planning.

Important Things To Consider When Choosing

• Current Market Conditions: Interest rates are most likely to go up, down, or remain stable.

• Your Risk Tolerance: How much can you tolerate the fluctuation in your repayment?

• Loan Term: The difference between the fixed and the variable rate will be less on a shorter loan.

• Business Cash Flow: Is your business able to afford higher repayments?

• Future Plans : Do you expect making extra repayments or refinance early

Making The Right Choice For Your Business

There is no definite answer as to whether business loans can be fixed or variable because it often depends explicitly on your circumstances and needs.

If you are a business that likes consistency, whereby your cash flow is relatively consistent over a period of time, then a fixed rate would be a more prudent move. This is especially significant if you are taking out a large bank loan over a long period or you believe that interest rates are likely to rise.

Conversely, if your business can introduce higher risk and you want to avail of potentially lower rates, then a variable rate may be chosen. This would be the case of borrowing for a shorter term or if you believe rates are more likely going to decrease.

Remember, this is not just about today's lowest rate. Think about different situations that will impact your business into the future. Do not hesitate to ask financial professionals for advice. They can give you very individual directions about your situation.

With some careful consideration about what is offered, you will make an informed decision that works with the needs of your business to ensure its financial health and growth.

Take The Next Step for Your Business

With this all clear, the differences between fixed and variable business rates, it is time to make those decisions. Do not be held back by uncertainty; go ahead and let your business be all it can be. Whether you lean toward the security and peace of mind of a fixed rate, or you appreciate the potential savings a variable rate may offer, the best choice is the one that is right for your individual business.

Keep in mind, with a well-informed choice about the loan for your business, you can possibly save thousands of dollars in the long term and with the financial flexibility you need for your small business to really take off. However, you do not have to do it all alone.

Credit Hub team members are business finance broker in Melbourne who will help you analyse your business's financial situation, discuss your goals, and identify the best loan option available. We will explain everything so clearly that you will be able to clearly understand our words, as in this blog, to let you feel confident in your decision.

Disclaimer: The information presented by staff or employees of Credit Hub and its associated companies is provided for general informational purposes only. We do not guarantee the accuracy, completeness, or timeliness of the data or views presented. Audience members should conduct their own research and verify any information before relying on it. Credit Hub and its associated companies are not liable for any errors or omissions, or for any actions taken based on the information presented.