A fixed interest rate stays the same for the entire loan term, making payments predictable. A variable rate adjusts periodically based on a benchmark index (Prime Rate or SOFR), causing payments to fluctuate.
Fixed and variable interest rates represent the two fundamental pricing structures in business lending. With a fixed rate, the rate set at origination never changes — every payment is identical, and you know the exact total cost of borrowing before you sign. Most bank business term loans and SBA 504 loans use fixed rates. Variable rates (also called floating or adjustable rates) are tied to a benchmark index — historically the Prime Rate, now increasingly SOFR (Secured Overnight Financing Rate, the LIBOR replacement). The lender adds a margin — for example, 'Prime + 2.5%' — and the total rate adjusts when the index moves, typically quarterly or annually. SBA 7(a) loans and most business lines of credit use variable pricing. For borrowers, the tradeoff is certainty vs flexibility. Fixed rates eliminate rate risk and simplify cash-flow planning. Variable rates often start lower (the yield curve prices in a premium for certainty), can decrease if benchmark rates fall, and are common on shorter-term products where rate swings matter less. Businesses with tight margins and predictable revenue typically prefer fixed. Businesses with flexible cash flow and shorter draw-down needs often accept variable. The Federal Reserve sets the federal funds rate, which indirectly drives Prime (typically Prime = fed funds + 3%). When the Fed tightens, variable-rate borrowers feel it immediately. Monitoring the FOMC outlook matters if your credit facility is variable.
Not necessarily. Variable rates can be advantageous when benchmark rates are high and expected to fall — borrowers benefit from decreasing payments without refinancing. Risk depends on your business's ability to absorb payment changes. Tight-margin businesses with fixed overhead typically prefer the certainty of fixed; flexible businesses may prefer variable.
SOFR (Secured Overnight Financing Rate), administered by the New York Federal Reserve, replaced USD LIBOR after June 30, 2023. New variable-rate loan contracts in the U.S. now reference SOFR rather than LIBOR. Some older contracts were transitioned to SOFR under the LIBOR Act (federal law enacted 2022).
Generally no — the rate structure is set in the loan agreement. Converting requires refinancing into a new loan. Some commercial lenders offer rate-lock or conversion options for a fee, but these are non-standard. Review the loan agreement for any conversion provisions before signing.
The Prime Rate is set by major U.S. commercial banks and tracks the federal funds rate — typically Prime = federal funds target rate + 3%. When the Federal Reserve's FOMC raises or lowers the federal funds rate, Prime follows within days. Variable-rate loans tied to Prime reprice accordingly.
Most SBA 7(a) loans are variable-rate, but SBA rules permit fixed rates in some circumstances. For loans of $50,000 or more, lenders may offer fixed rates if they choose. The SBA sets maximum allowable spreads over Prime for variable-rate 7(a) loans. Check current SBA guidelines at sba.gov for the latest rate caps.