28 Sep Fixed vs Floating Rate what’s better for SBA borrowers?
SBA offers financing through a lot of different programs; each with its own peculiarities and specificities. While all financing products are equally important and crucial, 7(a) and 504 are two of the most popular programs as they offer flexibility, lower down payments, and favorable prepayment terms. Even though most business owners are savvy and understand the nuances of financing terms, getting a fixed or a floating interest rate on their loan still causes unwarranted complexities.
SBA approved lenders who sell their loans earn higher premiums on variable (floating rate) loans. This higher profitability in variable rates is countered when lenders typically ask for higher servicing fees for fixed-rate loans. The type of interest rates that banks offer mostly depend on factors like:
• Existing Loan Pool
• Risk Assuming Capacity
• Preference Based on Historical Performance of Loans
• Market Volatility
Borrowers prefer fixed rate loans as they add a sense of security and steadiness to outgoing cash flows from the company. Business owners can’t control most of the cost elements and pay what the market demands for them; hence they like to keep their debt service under control. In an upward moving environment, fixed rate loan borrowers still pay lower rates thereby reducing costs.
This scenario is reversed in case of a variable or floating rate loan. In a downward moving environment, business owners end up saving money in terms of reduced loan payments compared to fixed-rate borrowers who still pay a higher interest rate that was previously fixed. Overall, it can be concluded that the type of interest rate on a loan is crucial in determining the optimum usage of capital for any company. Business owners need to study the market, consult specialists, and conduct informed discussions with their lenders whether they are institutional lenders like banks or non-institutional lenders to properly figure their requirements. Only after they have a solid idea of the aforementioned elements should an interest rate type should be finalized.