Small Business Loans; Fixed Rates vs. Variable Rates

Taking the time to research small business loans in Central New York will save you headaches and surprises down the road. There are many questions regarding the viability of obtaining a fixed-rate loan as opposed to a variable-rate loan. Both come with advantages and disadvantages. 
 
As you begin the loan process, take into consideration the length of the loan needed, the amount of the loan, and the interest rate. Be aware of what the current and predicted market trend is. As of right now, you may want to consider the potential impact of certain changes the Federal Reserve is considering. They control the banks small business loans in the finger lakesand interest rates, which can either help or hinder your future interest rates.
 
What Are Fixed-Rate and Variable-Rate
 
Fixed-rate loans, as the name implies, is an agreed upon interest rate that is applied to the life (term) of your small business loan. Typical small business loans run a term ranging from 10 to 50 years, with a 30-year note being the most common.
 
A fixed-rate loan allows you to budget easily for the loan amount with no surprises. No matter if the interest rate rises or falls, you will remain at the interest rate you agreed upon at the inception of the loan. Your business and budget are protected even if the interest rate skyrockets. This is the safest and contains the least amount of risk for you and your business. Should the interest rates drop drastically, you have the option of refinancing to a lower rate which can save you a significant amount of money.
 
Now, variable-rate loans are a bit more volatile but do come with advantages which could work in your favor. Variable-rate small business loans in the Finger Lakes are often started at a much lower rate than a fixed-rate loan. It's quite enticing to small businesses just getting started. And with that lower rate, your business can get up and running, producing more income with the loan repayments being lower for a period of time.
 
A variable-rate loan's interest rate will fluctuate periodically over the term and depending on the market rates at those times. The interest rate is tied to an index that changes as the market moves. Obviously that means that your interest rate and monthly payments can go up or down depending on the market activity. Typically, there is a bit of protection for you in the form of a cap. A cap limits how much of a change can be imposed on the loan. So if interest rates jumped 5 points...your loan, typically, would not bear the brunt of that hike. The cap on the loan interest rate would prevent that. Be sure to evaluate comparable small business loan terms and conditions. Some loans will offer a better cap and interest rate depending on the lender.
 
How to Decide Which Interest Rate Method is Preferable
 
With a fixed-rate loan, you can plan for the monthly expenditure without any surprises or changes. This is a low-risk option and can greatly reduce stress as your business is growing and expanding. Your business will always know what to expect to pay out each month.
 
A variable-rate loan, on the other hand, brings with it a constant anxiety as to what the market will do as your rate approaches the time for re-evaluation.
 
Businesses will often opt for the lower rate of the variable-rate loan as the payments are much lower (due to the lower incentive rate) at least for the beginning of the loan period.  This is very useful if your cash flow is on the low side and the business has not a solid customer base to start with. The danger here is that the rate could increase fixed rate loans in tompkins countysignificantly (even with a cap) that is causes hardship on the business to manage the increase.
 
Your Choice, Your Way
The decision as to whether to choose a fixed or variable rate small business loan really comes down to your personal inclination toward risk or stability. There are advantages and disadvantages to both. Consider the needs and strategies of your business and pick the one that best matches you.
 
If you have questions or would like to learn more about small business loans in Tompkins County, contact us here at Business Loan Connection and we will be happy to assist.
Published August 16, 2017 by Carol Chernikoff in Finance


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