Choosing Fixed- or Variable-Rate Business Financing
March 29, 2023 •Oak Street Funding
The latest decision from the Federal Reserve of only a 25 basis points increase in the federal funds rate signals we could be nearing the end of rate hikes. Chairman Powell restated the committee’s commitment to lowering inflation to 2%, acknowledging that further tightening may be necessary. However, many economists predict rates will level out in 2023 with the first decrease expected in Q1 of 2024.
These predictions leave many business owners wondering whether to pursue or pause on obtaining financing. Rick Dennen, founder and CEO of Oak Street Funding, addressed the potential concerns of borrowers.
He said, “Trying to time the ‘lowest’ cost of debt is typically not a prudent business decision, as it can result in losing out on growth opportunities.” So, for business owners who want to capitalize on growth opportunities, now is an opportune time to consider variable financing for business growth.
Fixed-Rate vs. Variable Rate: Which is Better?
The choice depends on the business and various factors. Given current rate projections, a variable loan might be your best option.
Two Choices: Variable- or Fixed-Rate
When determining the type of loan to use, business owners have two main choices: fixed- or variable-rate loans. In most economic environments, variable-rate loans offer some substantial advantages for businesses. Frequently, these loans are structured with lower rates compared to their “fixed” partners. In addition, lenders are typically willing to extend larger amounts through a variable-rate loan because it reduces the interest rate risk the lender has to assume.
Typically, variable-rate loans come with a lower rate, but if the federal funds rate increases, so will the interest rate of the loan. Conversely, as rates appear to be nearing their peak, opting for a variable rate loan means you can anticipate lower average interest rates during the coming years.
On the other hand, the biggest advantage of choosing fixed-rate lending is predictability. You can borrow with the confidence that your rate and monthly payments will remain unchanged for a fixed period of time, regardless of federal funds rate changes. Of course, if market rates should drop, your rate may be less of an advantage, and you could miss out on future savings that could be used to reinvest in, and help grow, your business.
The right choice for your company depends upon why you are borrowing, your company’s financial condition, your risk tolerance, and your predictions about how the interest rate environment might change in coming years. Your growth strategy may dictate your choice of a fixed-rate loan for long-term stability or a variable-rate loan for immediate cost savings and possibly lower interest payments in the future. If you would like to compare your options, you can use our interactive loan calculator to compare fixed versus variable rate loans.
Oak Street Funding offers customized financial solutions, including fixed- and variable-rate options. Contact us to learn more.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.