Fixed-rate loans lock your interest cost for the full term — predictable payments, no rate-spike exposure; variable-rate loans float against a reference index (prime rate or SOFR, per the Federal Reserve H.15 statistical release) — potentially cheaper when rates fall but carrying payment-shock risk when rates spike, as the 2022–2023 rate cycle demonstrated.
Variable-rate business loans float against a reference index — the two most common are the prime rate and SOFR (Secured Overnight Financing Rate). The prime rate is set by large U.S. commercial banks at roughly the federal funds target rate plus 3% — it moves whenever the Federal Reserve adjusts the federal funds rate. SOFR, introduced by the Federal Reserve Bank of New York as a replacement for LIBOR, is based on actual overnight Treasury repo transactions and published daily. Both rates are included in the Federal Reserve H.15 statistical release, which publishes selected interest rates daily and is the authoritative public reference for loan index verification. A typical variable-rate business loan might be priced as 'prime + 1.5%' or 'SOFR + 2.0%' — your rate moves as the index moves, with no floor unless contractually specified.
The 2022–2023 Federal Reserve rate cycle is the definitive case study in business-loan payment shock. The federal funds rate rose from 0.25% in March 2022 to 5.50% by July 2023 — a 525 basis-point increase in 16 months. For a variable-rate borrower with a $250,000 loan at prime + 1.0% (4.25% effective in early 2022), that same loan repriced to 8.50% by mid-2023 — a monthly payment increase of approximately $700–$1,000 on a 5-year term. Businesses without rate-shock planning absorbed this increase directly into operating cash flow. According to Federal Reserve H.15 data, the prime rate rose from 3.25% in March 2022 to 8.50% by August 2023.
Fixed rate is right when: You want payment certainty for budgeting purposes, you're financing a long-term asset (equipment, real estate) where you'll hold the loan to maturity, you believe rates are likely to stay flat or rise, your cash margins are thin and you can't absorb a payment increase. Variable rate is right when: You expect rates to decline materially (and have evidence-based conviction, not just hope), your loan term is short (12–24 months), you have strong operating cash flow and can absorb rate movement, or the available fixed-rate pricing is significantly worse than the variable starting rate and you're confident you'll refinance before a rate spike materializes. SBA 7(a) loans are predominantly variable-rate (prime-based) — a deliberate program design choice that keeps initial pricing accessible while passing rate risk to borrowers with SBA guarantee protection on the credit side.