Access to low-cost capital is more important than ever for small business owners. If you’ve been researching ways to fund your business, you may already have a checklist of important factors to consider. It’s also important to consider finding a completely transparent lender who can help determine details like what the fees will be, the amount of money you can borrow, and how long the loan term is going to be.
Finally, determine if the annual percentage rate (APR) is fixed or variable. Learn more about both fixed-rate loans and variable-rate loans to help you make an informed decision.
Terms to know
When seeking a loan, you might come across terms you are unfamiliar with. Here are a few common terms you might see in a loan agreement:
- Interest: The amount that the lender charges for letting you borrow money. The interest rate is presented as a percentage of the total amount that you borrow.
- Compounding: Interest is charged on both the amount you originally borrowed and any interest already accrued on that amount, less any repayments you have made. This is known as compound interest.
- Loan duration: The amount of time that you have to repay the loan.
- Repayment: The monthly repayment you make to reduce the balance of your loan.
- Base interest rate: The interest rate set by the government upon which loan and savings rates are based.
What is a variable-rate loan?
A variable-rate loan is a type of financing where the interest rate can change over time based on movements in a benchmark or market index. Instead of remaining fixed for the life of the loan, the rate adjusts periodically according to the terms defined in the loan agreement. Because of this structure, monthly payments may increase or decrease as interest rates shift.
Variable-rate loans often begin with a lower initial rate compared with comparable fixed-rate options. This is especially true in environments where lenders expect rates to change over time. However, the long-term cost of borrowing is less predictable because future adjustments depend on broader market conditions. For small business owners, this means the loan’s impact on cash flow may evolve during the repayment period.
These loans are commonly tied to widely used benchmarks and adjust at set intervals, such as monthly, quarterly, or annually. The specific timing and limits on how much the rate can change are outlined in the loan terms. For example, SBA 7(a) loans are frequently structured with variable rates, which adjust in relation to an established benchmark plus a lender margin.
How variable-rate loans work
Variable interest rates typically adjust in relation to a benchmark rate used throughout the lending market. In the United States, one of the most common benchmarks is the prime rate, which tends to move in response to changes in the federal funds rate set by the Federal Reserve.
When the benchmark changes, the interest rate on a variable loan may adjust as well.
Most variable loans are structured as the benchmark rate plus a lender’s margin. For instance, a loan might be priced at the prime rate plus a set number of percentage points. As the benchmark rises or falls, the total interest rate adjusts accordingly, which can affect future payment amounts. The timing and frequency of these adjustments are defined in the loan terms and can vary depending on the type of financing.
What are the current SBA loan variable rates?
As of March 2026, here are the rates for an SBA loan through SmartBiz Bank®.
Why does the prime rate fluctuate?
The prime rate generally changes sporadically. It is determined by meetings of the Federal Open Market Committee of the Federal Reserve Board.
The prime rate tends to rise when the economy is growing too quickly and inflation (the increase in the overall cost of goods and services over time and the reduction in the value of money) is going up faster than intended. The rate tends to fall when the economy is weaker, when financial markets are under pressure, and the government wants to stimulate growth. It tends to stay the same when the economy is growing at a reasonable pace and there is low, manageable inflation.
Advantages of a variable-rate loan
Variable-rate loans may offer flexibility, particularly for businesses that are comfortable with some movement in interest rates over time. One potential advantage is that variable loans often begin with a lower initial interest rate than comparable fixed-rate options. In certain market conditions, this lower starting point can reduce borrowing costs early in the loan term, which may benefit businesses focused on managing near-term expenses or investing in growth.
Variable rates can also move downward if benchmark rates decline. When that happens, the interest rate applied to the loan may decrease as well, which can lower monthly payments and overall borrowing costs. For some business owners, this potential for rate reductions makes variable financing an appealing option, especially if their cash flow can accommodate modest fluctuations in payments.
Disadvantages of a variable-rate loan
The primary consideration with variable-rate loans is that future borrowing costs may be less predictable. Because the interest rate adjusts in response to changes in the particular benchmark rate that is being used, monthly payments may increase if market rates rise. For businesses with tight margins or highly structured budgets, these fluctuations may require additional financial planning.
Rising rates may also affect the total cost of the loan over time. While the initial rate may be competitive, increases in benchmark rates may lead to higher payments later in the repayment period. For this reason, business owners often evaluate whether their cash flow can comfortably absorb potential changes in payment amounts before choosing a variable rate structure.
What is a fixed-rate loan?
A fixed-rate loan is a type of financing in which the interest rate remains the same for the life of the loan. Since the rate does not change, the interest portion of each payment stays predictable, allowing borrowers to make the same monthly payment throughout the repayment period. This consistency can make it easier for business owners to plan expenses and manage cash flow.
Fixed-rate structures appear in several common types of loans. Many personal loans are issued with fixed interest rates, meaning the cost of borrowing does not change over time. Auto loans are also frequently offered with fixed rates, which allows borrowers to make consistent payments while repaying the vehicle. Some private business loans and certain commercial financing options are structured the same way, offering rate stability regardless of movements in broader market benchmarks.
Advantages of a fixed-rate loan
The most notable advantage of a fixed-rate loan is payment stability. Since the interest rate does not fluctuate with market conditions, borrowers know exactly what their payment obligations will be for the life of the loan. This predictability can support long-term planning, especially for businesses that rely on consistent budgeting and stable cash flow.
Fixed rates can also provide protection in environments where market interest rates rise. If benchmark rates increase, the rate on a fixed loan remains unchanged, which can help businesses avoid unexpected increases in borrowing costs. For companies prioritizing financial predictability, this stability may make it easier to forecast expenses and evaluate the total cost of financing over time.
Disadvantages of a fixed-rate loan
While fixed rates offer stability, they may begin slightly higher than comparable variable rates in certain market environments. Lenders may price fixed loans at a premium because they are assuming the risk that interest rates could increase in the future. As a result, borrowers may pay a somewhat higher starting rate in exchange for long-term predictability.
It’s also important to note that fixed rates do not adjust downward if market rates decline. If benchmark rates fall after the loan is issued, borrowers with fixed-rate financing will generally continue paying the same rate unless they refinance. For some businesses, particularly those comfortable with moderate payment variability, a variable rate structure may offer more flexibility depending on their financial strategy and risk tolerance.
Choosing between a fixed- and variable-rate loan
Choosing between a fixed- and variable-rate loan typically comes down to how your business manages financial planning and cash flow stability. Each structure offers different advantages depending on your company’s growth stage, budget flexibility, and tolerance for potential payment changes. Rather than focusing solely on which option might produce the lowest interest cost, many business owners evaluate how predictable their monthly payments need to be and how much variability their cash flow can comfortably absorb.
Payment predictability is often a central consideration. Fixed-rate loans typically provide consistent payments for the life of the loan, which can make long-term budgeting more straightforward. For businesses that rely on stable operating margins or prefer clear forecasting over multiple years, this level of certainty can support more confident planning. Variable-rate loans, by contrast, may introduce some payment fluctuation as benchmark rates move, which may require additional flexibility in financial projections.
Loan term length can also influence the decision. With shorter-term financing, the likelihood of major rate changes affecting the total borrowing cost may be more limited, which can make either structure workable depending on the current rate environment. For longer-term loans, borrowers sometimes evaluate how potential rate movements could affect payments over time. In these cases, businesses may consider whether they value long-term payment stability or are comfortable with the possibility of adjustments as market rates shift.
Finally, a company’s overall financial position and risk tolerance play an important role. Businesses with stable cash flow and strong margins may feel comfortable managing moderate rate variability, particularly if the initial rate is competitive. Others may prefer the predictability of a fixed rate to support consistent budgeting and long-term planning. By considering cash flow resilience, growth plans, and loan duration together, business owners can choose the rate structure that best aligns with their financial strategy.
Questions to ask your lender
Make sure you’re working with a trustworthy lender, one that has a track record of successful fundings, with stellar customer service. Some additional questions to consider are:
- Does the loan carry an origination fee?
- What is the interest rate for the loan, and how is it applied?
- What are the loan’s repayment terms?
- What is the monthly repayment total?
- What will be the total repayable amount?
- Do you need to provide any guarantee or collateral for the loan?
- Can you repay the loan early?
- Are there any other fees?
- Are there any special terms and conditions?
The bottom line
If you need an SBA loan, we can help. Find out if you pre-qualify today.
