Are small business loans fixed or variable?

Can your small business save more money by taking a loan with a fixed or variable rate? Learn more about fixed and variable interest rates in this article and how to manage them on your business’ accounts.

We’ll cover the main differences between fixed and variable loans and how they impact your business’ growth strategy, and walk you through other financing options for your business. Discover:

• Are small business loans fixed or variable?
• What makes a loan ‘fixed’ versus ‘variable’?
• How is it different from ‘secured’ and ‘unsecured’?
• Should I choose a fixed loan or a variable loan?
• Can I change my mind after I’ve taken the loan out?
• What other options are there for small businesses?
• How to understand your loan affordability better

Small businesses have several loan options as they’re financing growth in their business. Small business loans can be fixed or variable, so there isn’t any one style of lending that covers UK business as a whole, and individual businesses can even mix and match how they can borrow to finance their business.

Loans are ‘fixed’ when the interest rate is kept at a set value for a period of time. This can be throughout the entire loan term or as an initial introductory period, after which the interest rate may lapse to something slightly higher (but still fixed) or a variable rate.

In contrast, loans are ‘variable’ when the interest rate can change throughout the loan term, sometimes suddenly. The variable rate is influenced by the UK ‘base rate’ set by the Bank of England – currently set at 0.1%, with a review set for September 2021. However, other factors go into the rate you receive (whether fixed or variable) as high street banks are free to set their interest rates how they like. 

‘Fixed’ and ‘variable’ refer to a loan’s interest rate; it can be high or low and change over time. In contrast, ‘secured’ and ‘unsecured’ refers to whether or not your loan is tied to an asset as collateral. 

For example, car loans, mortgages or credit agreements specifically for business equipment you’re buying are types of secured loans. Each of these agreements will usually specify that if you’re unable to pay back the loan amount, you’re required to give up asset to settle the agreement. Secured loans can have fixed or variable interest rates that reflect the value of the asset you’ve now bought.

However, sometimes businesses need or may prefer to use unsecured financing. For example, if you’re setting up a business from scratch and need to buy many different things, finding secured financing for many individual items may be too complex or unfeasible. In these circumstances, unsecured loans may make more sense as the lump sum is yours to use how you see fit. Unsecured loans typically have fixed interest rates since there isn’t a single asset to tie a variable interest rate to, and the term lengths are shorter so the variable rate may not change very much. 

Fixed loans offer you clarity when planning your growth and budget as they remain set payments over the loan’s term. For this reason, it’s typically a better idea to opt for this loan type. However, variable loan rates may work out cheaper if the business environment is healthy and variable loan interest rates are expected to stay low for a while. 

Nevertheless, it’s worth noting that many other factors go into determining your interest rate, and so deciding between ‘fixed’ or ‘variable’ loan options is only one consideration you need to research. Others include:

• Whether you’re willing to tie your new asset to the loan as collateral
• Your previous credit history as a borrower and how you can improve it
• Which lender you choose as some specialise in higher-risk or new borrowers
• The wider economy, including the base rate set by the Bank of England

You may wish to speak to a broker or use a comparison website to research all your options.

Some lenders may let you switch between fixed and variable rates. As mentioned previously, some fixed loan rates work as an introductory offer and change to a variable or different fixed rate after this period ends. 

Therefore, you could consider taking a cheaper introductory fixed rate and refinancing when it lapses to a better deal to keep your payments and interest low.

Small businesses have several other options as they seek to grow, although, unlike debt financing and loans, there are slight differences in the other options available to sole traders versus limited companies.

Learn more about the financing options available in our article How to finance a business and How to get funding for my business idea. We also have articles for single-business purchases touching on the secured-unsecured question and a guide weighing up the pros and cons of different financing routes at Financing a business purchase and What’s the best source of finance for small businesses?

Get a better deal on your interest rates by making sure you understand what your business can afford. You can use the Countingup app to gain live insights into your business’ performance as you source funding for your business.

Countingup is the two in one business current account with free, built-in accounting software. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK.

Countingup comes with automatic invoicing tools, expense categorisation, a receipt capture feature and real-time cash flow insights. They work together to help you keep on top of your finances and spend more time focusing on growing your business.

Gain complete confidence in your business’ finances and stand out as a competent entrepreneur to potential lenders. Find out more here and sign up for free today.