Pros and Cons of an Adjustable-Rate Business Loan

Nearly all business loans fall under one of two categories: fixed rate or adjustable rate. They both involve borrowing money from a lender. The difference lies in their interest structure. Fixed-rate business loans are structured so that the interest rate never changes throughout the entire term of the loan. Adjustable-rate business loans, on the other hand, are structured so that the interest rate fluctuates in response to broader economic conditions. Here are some of the pros and cons of financing your business with an adjustable-rate business loan.

Pros and Cons of an Adjustable-Rate Business Rate

Pro: Lower Initial Interest Rate

One of the benefits of choosing an adjustable-rate business loan is a lower initial interest rate. They are less “risky” for lenders. Lenders know exactly how much money they will earn on them, so they typically offer a lower initial interest rate on them. In comparison, lenders don’t know how much money they will earn on fixed-rate business loans. If the federal funds rate increases, lenders may unexpectantly earn less money on fixed-rate business loans.

Pro: Potential for a Lower Interest Rate

With an adjustable-rate business loan, you may be able to take advantage of a lower interest rate in the future. The Annual Percentage Rate (APR) is heavily influenced by the federal funds rate. As the Federal Reserve changes the federal funds rate, lenders will change the APRs of their adjustable-rate business loans — as well as other adjustable-rate loans — accordingly. Therefore, a lower federal funds rate may result in a lower interest rate for your adjustable-rate business loan.

Con: Potential for a Higher Interest Rate

Interest rates on adjustable-rate business loans can go both ways. The Federal Reserve may raise the federal funds rate, resulting in higher interest rates. Alternatively, the Federal Reserve may lower the federal funds rate, resulting in lower interest rates. If it raises the federal funds rate, you can expect to pay more in interest. Of course, higher interest rates are only a concern with adjustable-rate business loans. Fixed-rate business loans live up to their namesake by featuring a fixed, non-adjustable interest rate, regardless of the federal funds rate.

Con: Budgeting Difficulties

An adjustable-rated business loan can prove problematic when trying to set a budget. You won’t know how much you’ll have to pay in interest, as the interest rate may change. This lack of predictability can be a drawback for businesses that rely on stable and consistent financial planning.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.