Fixed rate vs variable rate – what is the best option?

When choosing business finance, one of the biggest decisions is whether to opt for a fixed-rate or variable-rate loan. Each option has its pros and cons, and the right choice depends on a business’s financial situation, risk tolerance, and market conditions.

Fixed rate loans – stability and predictability

A fixed-rate loan has a set interest rate that remains the same throughout the loan term. This means monthly repayments are consistent, making budgeting easier.

Pros of fixed-rate loans: 

• Predictability – Repayments stay the same, making financial planning easier.
• Protection from rate increases – Even if interest rates rise in the market, often an agreed rate remains unchanged.
• Easier cash flow management – Helps businesses with tight budgets or stable income. 

Cons of fixed-rate loans:

• Higher initial rates – Fixed rates are often higher than variable rates at the start of an agreement.
• Less flexibility – If interest rates drop, there will not be any benefits from lower repayments.
• Early repayment fees – Some lenders charge extra for paying off the loan early.

Variable rate loans – flexibility and potential savings

A variable-rate loan has an interest rate that fluctuates based on market conditions, often linked to the Bank of England base rate or other financial benchmarks.

Pros of variable-rate loans:

• Lower initial rates – Often starts lower than fixed rates, saving money in the short term.
• Potential cost Savings – If interest rates drop, the repayments decrease.
• More flexible terms – Some lenders offer fewer early repayment penalties. 

Cons of variable-rate loans:

• Uncertainty – Monthly repayments can increase if interest rates rise.
• Budgeting challenges – Cash flow management can be harder due to fluctuating costs.
• Higher risk – If rates rise significantly, a business could struggle with repayments.

Which option is best?

The right choice depends on a business’s financial situation and risk tolerance:

Choose a fixed rate for…

• Stability and predictable repayments.
• Businesses that operate on a tight budget and cannot afford rate increases.
• Concerns that interest rates could rise in the near future.

Choose a variable rate for…

• Handling fluctuations in repayments.
• The chance to benefit from lower interest rates.
• Companies who have a strong cash flow and can manage potential increases.

Ultimately, the best option depends on the financial goals, risk appetite, and market conditions. If unsure, consult with our team as we can help make an informed decision tailored to the business needs.

To find out more please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.