Fixed Term Business Loans

Name: Fixed Term Business Loans
Creator: Savvy
Published: 2021-11-09T10:19:39+10:30

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Written by , updated on July 26th, 2023

If you’ve read anything about business lending, you may well have come across the term “fixed term loan”, but what is a it? How is it different from other types of business finance and why would I want one? Find out all about fixed term loans in this handy guide.

What is a fixed term business loan?

A fixed term business loan – also known as a fixed rate loan – is a business loan where the value of the interest rate is locked in and does not change. This can sometimes be throughout the life of the loan, but quite frequently is only for a set period of time (generally around two to five years).

Many business loans – and many loans in general – have the option of a fixed or variable interest rate. A variable rate is where the interest rate on the loan remains tied to national interest rates: when the national rate goes up or down, the interest rate on your loan may do the same, and your repayments increase or decrease accordingly. A fixed term loan, by contrast, locks in your interest at the current advertised rate, regardless of national interest rate rises or dips. Not every lender offers fixed term loans, so it’s worth doing your homework to find the best options. It’s also worth knowing that many lenders regard variable rate as the default choice, so you’ll often have to specifically opt for a fixed term loan if there’s a choice, and that it’s common for fixed rate business loans to revert to a variable rate after a set period of time.

Why should I choose a fixed term business loan?

A fixed term loan has the advantage of being protected from national interest rate increases or increases dictated by your lender. If you’re able to get a fixed interest rate on a loan during a period when interest rates are low, you keep that low interest rate and benefit from it throughout the entirety of your fixed term. It also has the advantage of being more consistent and predictable. The repayments for fixed term loans are the same each time, which means you can budget more precisely – the cost of loan repayments will remain constant. By contrast, an interest rate hike with a variable rate loan can leave you struggling, as repayments increase and go over budget.

If you’re in Australia and hoping to find a business loan with a good interest rate, Savvy is a good place to get started. You can easily compare business loans from top Australian lenders, and find a low-rate loan that’s right for you and your business.

Is there any advantage to choosing a variable rate for a business loan, rather than a fixed term?

There are some benefits to variable rate loans that can potentially make them a viable alternative.

Firstly, they’re sometimes less expensive. Fixed term loans have – on average – slightly higher interest than variable loans. This is true even if the interest reverts to variable rate down the track, as fixed term loans that revert to variable can sometimes be charged higher interest than a normal variable rate. This isn’t always the case, though; some lenders advertise the same rates on both types.

Secondly, if interest rates are particularly high when you’re setting up the loan, a variable rate means you’re not committed to that rate – you're only paying the higher interest until the rate eventually falls.

A third benefit is that they can take advantage of low interest rates in several ways. If interest rates go down, your repayments will follow suit. In many cases, this could simply mean extra money in your bank account each fortnight. If your lender doesn’t charge fees for early repayments, though, there’s another alternative – you can leave the repayments at the original amount, meaning you pay off the loan faster.

Of course, if you lock in a fixed rate loan at a low interest rate, there’s nothing to stop you paying slightly more to achieve the same effect.

Types of business loan

Unsecured business loans

The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.

Secured business loans

If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.

Small business loans

Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.

Low doc business loans

Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.

Lines of credit

A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.

Invoice finance

Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.

Equipment loans

A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.

Supply chain finance

With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.

Inventory finance

Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.

Overdraft facility

An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.

Cash flow loans

You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.

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Frequently asked questions about fixed term business loans

Can I get a fixed term on both secured and unsecured business loans?

Yes – in Australia, both fixed and variable interest rates for business loans are available regardless of security requirements, as well as a variety of other loan products – they're a common feature of home loans, for example. When going for a fixed rate it’s also worth asking how long the rate remains fixed for, as this can vary between loans and lenders.

Is it possible to refinance a fixed term business loan?

Generally, yes – despite the name, a fixed term loan can be refinanced like any other loan, so if a more affordable option becomes available (such as going from an unsecured business loan to a secured one) you should be able to finalise the loan and refinance the debt. It’s first worth confirming what fees your lender might charge for settling the loan early, though, as this can potentially lessen the benefit of changing.

How much can I borrow with a fixed term business loan?

Because there are many different types of loan available as fixed term loans, there are fixed term solutions for almost any amount of money you need to borrow. A fixed term unsecured loan could be for as little as a few thousand dollars or as much as $300,000, while a secured loan can offer fixed term interest for considerably larger amounts – although it’s worth remembering that for a larger loan, the interest may revert to variable rate before you’ve paid off the debt.

Is it possible to have a mix of fixed and variable interest on the same loan?

Yes, it is – this is referred to as a split rate loan. Not every lender offers it, but some do. Split rate loans effectively splits the loan into two separate portions – one rate fixed and the other variable. This gives some of the benefits of each loan type – you gain some benefit from interest rate drops, but also have some protection against rate hikes.

Will opting for a fixed term business loan make it harder to get approval?

No – generally, fixed or variable rate interest should have no impact on getting a loan approved. While it’s probably fair to say some lenders prefer variable interest (which has slightly less risk for the lender), this tends to show itself in slightly higher interest rates, or simply in not offering a fixed interest option.

How soon do I need to repay a fixed term loan?

This depends more on the size and type of loan than on the type of interest rate. Unsecured loans are generally set up to be paid off in a few years. Secured loans generally have longer terms, often up to a decade in length, but a fixed rate secured loan will often revert to a variable rate within 2-5 years. This is sometimes advertised as part of the loan, as a “5-year fixed rate” business loan rather than just “fixed rate”.