Fixed or variable business loan: how to choose before rates move again
A fixed or variable business loan suits different plans. Here is how to choose, what an early repayment charge costs and what to ask before you sign.
Reading time5 min read
CategoryBusiness guides
Written byThe bizbritain team
Choosing a fixed or variable business loan comes down to what you are funding and how long you need the money. A fixed rate keeps your repayments the same for the fixed period. A variable rate moves with Bank Rate, so it can rise or fall. With another rate decision due on 17 December, it is worth choosing on purpose rather than by default.
The Bank of England raised Bank Rate to 4% on 5 November. On 10 November, Deputy Governor Clare Lombardelli said there is "likely to be a case for a further increase in rates in the near term". That is one member's view, not a decision. The next decision is due on 17 December.
Section 01
What changes when Bank Rate rises?
A variable business loan usually tracks Bank Rate plus a set margin. When Bank Rate goes up, your rate goes up by the same amount. Your repayments change from a date set in the agreement.
According to the Bank of England, corporate bank lending rates "often reference Bank Rate". Overdrafts and revolving credit facilities are usually variable too.
A fixed rate stays the same for the fixed period. Some loans are fixed for a few years and then move to a variable rate. Check your agreement to see which you have and when any fixed period ends.
Section 02
Why would a business choose a fixed rate loan?
The main reason is certainty. You know every repayment before you sign, so you can plan cash flow around it. That matters most when margins are tight or the loan runs for several years.
Here is an example. The figures are illustrative, not a quote. Take a loan of £100,000 repaid over five years.
£1,980a month at 7% a year
£1,992a month at 7.25%, about £140 more a year
£2,028a month at 8%, about £570 more a year
£2,851more interest over five years at 8% than at 7%
A quarter point on its own is a small change on a loan this size. It matters more if several rises follow, or if the business has little room in its monthly budget. A fixed rate removes that risk. A variable rate leaves it with you.
Fixing is not free. A fixed rate can start higher than the variable rate on offer. If rates fall instead, you keep paying the fixed rate.
Section 03
Can you pay off a fixed rate loan early?
Usually yes, but it can cost you. Many fixed rate business loans carry an early repayment charge. It covers the lender's cost of ending the fixed deal before the agreed date.
Check how the charge is worked out before you sign. It may be a percentage of the amount you repay, or a set number of months' interest. Some charges fall as the loan gets older.
Variable loans often have lower early repayment charges, or none. So if you expect to clear the loan early, for example from a large contract or the sale of an asset, a variable rate may cost less overall.
Section 04
Fixed or variable business loan: matching the rate to what you fund
Your view on where rates are going matters less than your plans for the money. These are the usual patterns.
Equipment or a fit-out over several years
A fixed rate often suits. The asset earns its keep over years, and steady repayments are easier to plan around.
Stock or a short cash flow gap
A variable facility often suits. You may repay within months, so early repayment flexibility matters more than certainty.
Money you may repay early
Compare the early repayment charges first. A cheap fixed rate can turn expensive if you leave it in year two.
A tight monthly budget
A fixed rate protects you from a rise you could not absorb. Run your numbers at one point higher before you choose variable.
You do not have to choose one or the other for everything. Some businesses fix a term loan for a large purchase and keep a variable overdraft for day-to-day swings.
Section 05
Questions to ask before you sign
Is the rate fixed or variable, and for how long?
If it is variable, what does it track, and what is the margin?
Is there an early repayment charge, and how is it worked out?
What happens when a fixed period ends?
What would my repayment be if Bank Rate rose by one point?
Lenders price these choices differently, so the same loan can look very different from one offer to the next. If you are comparing offers, a broker can look at the deal across a wider range of lenders. Our page on business growth finance explains how we help.
Got a question the guide didn’t answer? Talk to an advisor.
We’ve arranged growth finance for thousands of British businesses. If you’ve read the guide and you want to see what £25k to £10m from 100+ lenders could do for yours, our advisors are on the phone now.