Fixed or variable for a business loan: what you are really choosing between

Here is the question hiding behind this one: how much of a surprise can your business absorb?

Fixed versus variable is often dressed up as a bet on where interest rates will go. It isn’t, or at least it shouldn’t be. Professional forecasters get it wrong all the time, and a small business doesn’t need to out-guess them. What it needs is a loan whose worst case is survivable.

What is the difference between fixed and variable?

On a fixed loan, the pricing is set at the start for an agreed period, commonly one to five years. Your repayment doesn’t change during that time, whatever the market does.

On a variable loan, the lender can change the pricing over the life of the loan. In practice that tends to follow the Reserve Bank’s cash rate decisions, which the RBA’s board makes at scheduled meetings through the year, though lenders also move for their own reasons. Our glossary entry on variable rate has the definition.

	Fixed	Variable
Repayment during the period	Stays the same	Can rise or fall
Extra repayments	Often capped or restricted	Usually allowed, sometimes with redraw
Repaying or refinancing early	Break costs may apply	Usually simpler, though exit fees can apply
Benefit if market pricing falls	None until the period ends	Often some, depending on the lender
Protection if market pricing rises	Full, for the fixed period	None
Good for	Budget certainty	Flexibility

Some products sit outside this choice entirely. A factor rate advance or a flat-fee short term loan sets its total cost at the outset, so it behaves like a fixed arrangement whether or not it uses the word. If you’re looking at one of those, the real question is covered in the true cost guide.

How much can a rate move cost you?

Let’s make it concrete without quoting any particular pricing. Suppose a business has a $400k variable loan. Each quarter of a percentage point of movement changes annual interest by about $1,000, which is roughly $83 a month. A full percentage point changes it by roughly $4,000 a year, or about $333 a month.

Is that a lot? It depends on the business.

• A firm clearing $60,000 a month can absorb $333 without noticing.
• A firm whose margin is thin and whose repayments already take a quarter of its cash flow may find that the same $333 is the difference between a comfortable month and a late supplier payment.

That’s the test. Don’t ask “will rates fall?” Ask “if my repayment rose by $4,000 a year, what would I cut or delay?” If the answer is “nothing, I’d be fine”, variable is low risk. If the answer is “I’d be in trouble”, fixed is buying you something real.

There’s a second effect worth knowing. When lenders assess whether you can afford a loan, many test your ability to meet repayments with a buffer above the current pricing. If your numbers are tight, that buffer is one reason an application fails, and fixing doesn’t change the test. The guide on what lenders mean by serviceability goes into it.

Working through this for a real loan? Our enquiry form is a quick way to get a person looking at your numbers.

What do break costs do to a fixed loan?

This is the part owners most often miss. If you repay or refinance a fixed loan before the period ends, the lender may charge break costs. The idea is that the lender priced the loan expecting to earn a set return for the full period, and early repayment disrupts that.

Break costs can be small, or they can run to thousands. They tend to be larger when market pricing has fallen since you fixed, because the lender is stuck with money it would now lend out for less. That’s a nasty coincidence: the moment fixing looks like a mistake is also the moment leaving is most expensive.

So before fixing, ask these:

1. How are break costs calculated, and can you show me an example with my loan?
2. Can I repay a set amount each year without penalty?
3. What happens if I sell the property or the business during the fixed period?
4. Is there a fee to switch to variable?

Our glossary has a plain definition of break costs, and the guide on early repayment savings and penalties shows how they interact with other exit charges.

When does fixed make sense?

Fixed tends to suit owners who:

• Run on thin margins where one bad month can cascade
• Have a long-term asset, such as a commercial property or major equipment, that they intend to hold
• Need to quote contracts with known costs over the next few years
• Have a lender or investor who wants predictable debt service
• Simply sleep better knowing the number

It suits less well if you expect to sell, refinance or repay a lump sum soon. A loan you plan to clear when a debtor pays or a property settles is a poor candidate for a fixed period with break costs.

When does variable make sense?

Variable tends to suit owners who:

• Expect to make extra repayments or clear the loan early
• Have cash flow with room to absorb a rise
• Want a redraw or offset-style feature (ask whether the lender offers one on business loans)
• Might refinance in a year or two as the business matures
• Are borrowing on a shorter term where the exposure is brief

It is also usually the simplest option when the loan is short enough that the question barely matters.

Is there a middle path?

Yes: a split. You fix a portion, perhaps half, and leave the rest variable. The fixed half gives you a floor under your budget. The variable half takes extra repayments and benefits if pricing falls. If a surprise comes, only part of the loan is exposed.

Splits are common on larger bank loans and property-secured facilities. Ask whether the lender lets you change the proportions at the end of the fixed term, and whether each portion carries its own fees.

An illustrative example

A café group borrows $400k to refurbish two sites and buy a second coffee roaster. It is deciding between a three-year fixed period and a variable loan on the same term. The figures are examples.

Its owner runs the stress test: a one-point rise adds about $4,000 a year, and the group’s net profit after existing repayments is $75,000. A rise like that is uncomfortable but survivable. But the owner also plans to sell one site in 18 months and use the proceeds to pay down $150k.

That second fact decides it. A fixed period would put break costs on the lump sum repayment, so the owner picks a split: $250k fixed for three years and $150k variable, which can be cleared when the site sells without penalty.

The right answer came from the plan for the money, not a view on interest rates.

What should you check in the contract?

Whichever you choose, read three clauses.

• When can the lender vary pricing? On a variable loan, the contract should say what triggers a change and how much notice you get.
• What happens at the end of the fixed period? Most loans revert to variable pricing, which may not match what you were paying. Put the date in your diary.
• What are the fees to switch? Some lenders charge to move between fixed and variable.

Small businesses also have some protection against one-sided contract terms. ASIC explains that the unfair contract terms rules apply to many small business loans, although the headline price is excluded from the test. If a variation clause looks lopsided, query it before signing. You can also read how to read a letter of offer for the rest of the checklist.

Not sure which way to lean?

If you’d like to talk it through with someone who sees these decisions every day, start with the form. It takes about a minute, and asking won’t leave a mark on your credit file. We don’t hand your details to a stack of lenders. A real person reads what you’ve written and calls you to go over the options. Tell us the amount, the purpose, whether you expect to repay early and how tight your cash flow is, and we can steer you toward something that fits.

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