Are small business loans fixed or variable?

Written by

James

Business Finance Expert

James is a business finance expert with over 10 years of experience helping small business owners navigate loan options and make informed financing decisions. He specializes in SBA loans, term loans, and helping entrepreneurs understand the nuances of fixed vs variable rate financing.

This is one of the most common questions small business owners ask when shopping for financing. The answer depends on your lender, loan type, and what you qualify for. Let me break down both options so you can make the right choice for your business.

Question (from a small business owner)

Hey everyone, I'm in the process of getting a business loan to expand my operations and I keep seeing these terms "fixed rate" and "variable rate" everywhere. I'll be honest, I'm not totally sure what the difference is or which one I should go with.

My business has been running for about 3 years now, and things are going pretty well. I need to borrow around $50k to open a second location. The thing is, I really need to know exactly what my monthly payment will be so I can plan my budget properly. I've heard horror stories about payments suddenly going up with variable rates, but I also don't want to overpay if I don't have to.

Can someone explain the actual difference between fixed and variable rates? And which one makes more sense for someone like me who needs predictable payments? Any advice would be really appreciated.

Answer (from a small business finance expert)

Great question. The difference comes down to whether your interest rate stays the same or changes over time. Here's what you need to know:

Fixed-rate small business loans

A fixed-rate loan locks in your interest rate for the entire loan term. Your monthly payment stays exactly the same from start to finish, which makes budgeting straightforward.

Pros:

Predictable payments every month
Easier to manage cash flow
No surprises if market rates spike

Cons:

Usually starts with a slightly higher rate compared to variable loans
You won't benefit if rates drop

Example:

Say you take out a $50,000 loan at a 10% fixed rate for 5 years. Your payment amount stays the same every month—around $1,062—no matter how market rates change. You can set this in your budget and forget about it.

Variable-rate small business loans

A variable-rate loan adjusts based on market conditions. Most lenders tie it to a benchmark like the prime rate or SOFR (Secured Overnight Financing Rate). When rates go down, your interest rate and payment can decrease. When rates go up, your payments may increase.

Pros:

Potential savings when rates are low
Often starts with a lower initial rate

Cons:

Uncertainty—payments can rise if interest rates increase
Harder to budget long-term
Could cost more if rates climb significantly

Example:

If your loan's interest rate is prime + 2% and the prime rate rises from 7.5% to 8%, your new interest rate becomes 10%. That increases your monthly payment, which could strain your cash flow if you weren't prepared for it.

Which option is better for most small businesses?

For most small business owners, especially those planning long-term finances, a fixed-rate loan offers peace of mind. You know exactly what you're paying each month, which makes cash flow management much simpler.

Choose a fixed-rate loan if you prefer stability and predictability. This is especially true for SBA loans and traditional term loans where you're committing to a longer repayment period.

Choose a variable-rate loan if you can handle fluctuating payments and want to benefit from possible rate drops. This might work if you have strong cash reserves or your revenue is highly seasonal and you can pay more during good months.

Bottom line: if you need something predictable so you can plan your budget—which sounds like your situation—go with a fixed rate. The slightly higher initial rate is usually worth it for the peace of mind and budgeting certainty.

Summary

Small business loans can be either fixed or variable. Fixed-rate loans keep the same interest rate for the entire term, making payments predictable and easier to budget. Variable-rate loans adjust based on market conditions, offering potential savings when rates are low but creating uncertainty if rates rise. For most small business owners, especially those planning long-term finances, a fixed-rate SBA or term loan offers the best balance of predictability and peace of mind.