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Why choose a fixed rate business loan?

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Tom Renwick07 March 2022
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With interest rates on the rise, fixed rate loans are becoming a more attractive prospect for business owners looking to lock in a stable source of financing. In this blog post, our Head of Business Lending Tom Renwick takes a deeper dive into the benefits that one of these loans might be able to deliver for your customers.

When you’re evaluating the most suitable business financing on the market for your customer, it’s likely that you’ll be looking at a range of products, including fixed rate loans. While there’s much to consider, a fixed loan can usually offer some stability compared to some of the other options that are available.

To make life easier, in this blog we’ve rounded up some of the benefits that a fixed rate loan could bring to a business. We hope it will help you decide if this type of product is the right fit for your customer.

Offer stability in uncertain times

The principal benefit of a fixed rate loan is that the interest rate is fixed for the duration of the loan, no matter what happens to interest rates, so it’s not subject to movement like a variable rate loan.

Recently, we’ve seen several base rate changes made by the Bank of England as they react to strained economic conditions. While variable rate loans typically will have moved in line with changes to base rate, making them difficult to plan around, fixed rate loans remain fixed, bringing certainty for businesses during an unpredictable period.

Of course, when interest is low, a fixed rate loan remains the same and will not pass on the benefit of reduced interest to businesses. However, considering that we’ve seen two base rate increases in quick succession since December, with the prospect of a third successive interest rate rise from the Bank of England looming, following the easing of COVID restrictions generating growth and leading inflationary pressure, a fixed rate loan may offer the opportunity to lock in a rate that won’t change in the face of rising interest. The question in 2022 is no longer whether interest rates will rise — but by how much. So, securing a fixed interest rate may be cheaper in the long run.

Allow for easier planning

When a business takes out a fixed rate loan, they will know the exact amount that they will need to pay back upfront. In contrast, the total that will be paid back on a loan with variable interest can change, so there simply isn’t the same level of certainty.

By choosing terms from two to six years, a business can also choose how long the interest stays the same. In the long term, this makes it much easier to make plans around a fixed rate loan. When setting an annual budget, your client will not have to account for any change in interest rate, allowing them to get a much firmer picture of how the year will look.

In the short term, a fixed rate loan also ensures that there will be no nasty surprises for businesses on a month-to-month basis. With borrowers protected from sudden and potentially significant increases in payments if interest rates rise. Even if the base rate goes up, any payments will stay the same as they were when the loan was taken out. This means that businesses don’t have to worry about having to adjust their plans to account for higher payments.

Provide peace of mind for business owners

Beyond the financial benefits that a fixed rate loan can offer your customers, it’s also worth thinking about the peace of mind they can bring in turbulent times.

As they are simple and low maintenance, there’s less chance your customer may need to make any last-minute adjustments, which may be just what they need after a stressful couple of years. This will hopefully give them more space to do what they do best: run a successful business.

Think that a fixed rate business loan might be just the ticket for your customer? Then you will be pleased to know that we offer uncomplicated, transparent options through the RLS scheme (£250K–£2m) and our own secured loans (£2–5m) that could deliver essential financing for recovery or growth.