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Fixed vs. variable rate business loans
Most SBA 7(a) lending is variable and most 504 lending is fixed. What that means for your payment if rates move, and how to test it before you sign.
A fixed rate keeps the payment the same for the life of the loan. A variable rate moves with a base rate, usually prime. Most SBA 7(a) loans are variable and most 504 loans are fixed, which is one of the real differences between the two programmes and is rarely explained.
How variable rates actually move
A variable business loan is priced as a base rate plus a spread. The spread is fixed for the life of the loan; the base moves. Today the WSJ prime rate is 7.00% — see the rates page for the current figure and its source.
So a loan at prime plus 3% charges 10.00% today, and will charge whatever prime becomes plus 3% later. Your payment changes with it, usually at defined reset dates rather than daily.
The comparison that matters
| Fixed | Variable | |
|---|---|---|
| Payment certainty | Complete | None beyond the next reset |
| Starting rate | Usually higher | Usually lower |
| If rates rise | You win | Your payment rises |
| If rates fall | You are stuck, unless you refinance | You benefit automatically |
| Typical SBA programme | 504 — fixed for the whole term | 7(a) — usually variable |
| Planning | Straightforward | Requires a stress test |
The test to run before you accept a variable rate
This takes two minutes and almost nobody does it.
- Take the quoted rate and add two percentage points.
- Recalculate the monthly payment at that rate in the loan payment calculator.
- Check that payment against your worst recent month, not your average one.
- If it does not work, the loan does not work — take the fixed rate, borrow less, or lengthen the term.
Where fixed genuinely wins
- Long-dated real estate. You are committing for 20 to 25 years; certainty is worth paying for. This is a large part of why SBA 504 is so attractive for owner-occupied property — fixed for the entire term, fully amortizing, no balloon.
- Thin margins, where a payment increase would eliminate your profit.
- You cannot refinance easily — a weak file means being stuck with a rising rate.
Where variable is reasonable
- Short terms. Less time for rates to move against you.
- You intend to repay early and there is no prepayment penalty.
- Comfortable coverage that survives the stress test above.
- Revolving facilities, which are generally variable regardless.
Questions people actually ask
Are SBA loans fixed or variable?
Most 7(a) loans are variable, priced as a base rate plus a spread capped by the SBA. The 504 programme is fixed for the entire term with no balloon, which is one of its main attractions for property.
What happens to my payment if prime goes up?
On a variable loan the rate rises by the same amount and your payment increases at the next reset. Stress-test the payment at two points above the quoted rate before you accept it, and check it against your worst month rather than your average.
Should I choose a fixed rate to be safe?
Not automatically -- you pay for the certainty in a higher starting rate. Fixed is strongest on long-dated property debt and thin margins. On short terms with comfortable coverage, variable is often the better trade.