Fixed or variable pricing on a business loan?

For larger and longer business loans, you may be asked whether you want the price fixed or variable. It sounds like a bet on where the market is heading, and partly it is. But for most businesses the more useful question is about certainty and flexibility: how much do you value knowing exactly what your repayments will be, and how much do you value being able to repay early or change the loan?

What fixed means

With fixed pricing, the cost of the loan is set for a defined period, which could be the whole term or part of it. Repayments stay the same for that period regardless of what happens to the lender’s pricing. Many short-term business loans are effectively fixed from day one, with the total cost known at the start.

What variable means

With variable pricing, the lender can change the cost over the life of the loan, usually with notice. Repayments may rise or fall. Lines of credit, overdrafts and many longer business loans use variable pricing. Lenders’ variable pricing tends to move with broader funding costs; the Reserve Bank’s statistics show how lending conditions have changed over time.

Side by side

	Fixed	Variable
Repayment certainty	High for the fixed period	Lower; can change
Extra repayments	Often limited	Usually allowed
Early payout	May incur break costs	Usually simpler
Redraw or flexibility	Often limited	Often available
Budgeting	Easier	Needs a buffer

When fixed tends to suit

• The business has tight margins and needs predictable repayments.
• The loan funds a long-term asset or premises with stable income.
• You do not expect to repay early or make large extra repayments.
• Your lenders’ covenants depend on predictable interest cover.

When variable tends to suit

• You expect lump sums and want to reduce the balance quickly.
• You may sell, refinance or restructure within a few years.
• The facility is revolving, such as a line of credit.
• You value flexibility over certainty.

Break costs: the hidden part of fixed

If you repay or change a fixed-price loan before the fixed period ends, the lender may charge break costs to cover its own costs of unwinding the funding it arranged. Break costs depend on market conditions and the time remaining, and can be large. Ask how they are calculated and for an example before you choose fixed. Our guide to early repayment and payout figures explains the wider picture.

Splitting the difference

Some lenders let you split a loan into fixed and variable portions. That gives partial certainty while keeping some flexibility for extra repayments. It can suit businesses that want stable core repayments but expect some irregular income.

How to compare fixed and variable offers

Price alone does not settle it, because a variable price can change. Compare the fixed offer’s total cost over the fixed period with the variable offer’s current cost, then consider how much a change in variable pricing would affect your repayments. Test both against your worst month. The repayment coverage calculator helps you see whether a higher variable repayment would still be affordable.

Questions to ask

1. How long is the fixed period, and what happens when it ends?
2. Can I make extra repayments, and how much?
3. How are break costs calculated? Can you give an example?
4. How often can variable pricing change, and with how much notice?
5. Can I split the loan between fixed and variable?

An illustrative example

A made-up dental practice buying its premises chooses to fix most of the loan for several years so repayments match its stable billings, and leaves a smaller portion variable so it can pay down debt with any surplus at year end. When it later receives an unexpected lump sum, it applies it to the variable portion without break costs.

End of the fixed period

When a fixed period ends, the loan usually reverts to variable pricing unless you fix again. Diarise the date and review options a couple of months before, including whether refinancing would suit better. Lenders do not always offer their best pricing to existing customers automatically.

What certainty is worth to your business

One way to decide is to ask what a rise in repayments would do to the business. If a moderate increase would force you to cut staff hours, delay supplier payments or dip into tax money, certainty has real value and fixing at least part of the loan may be wise. If the business has healthy margins and a cash buffer, the flexibility of variable pricing may be worth more. There is no right answer for everyone, but there is usually a sensible answer for your numbers.

Fixed pricing on short-term loans

Many short-term business loans are priced with a fixed total from the start. That gives certainty about the total cost, but it also means early repayment may not save much. If you expect to repay early, ask whether a different structure, such as a revolving facility or a loan with interest on a reducing balance, would suit better.

Want to talk through fixed or variable?

If you are weighing up pricing structures for a larger loan, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Tell us whether you expect to repay early or make lump sums; that answer in your enquiry usually points to the right structure.