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Choosing between a fixed and variable rate on a business loan is really a decision about how much rate uncertainty your business can comfortably absorb — and about where you think interest rates are headed over the life of your loan.
How Each Works
A fixed rate locks your interest rate for the entire loan term — your payment stays the same from the first month to the last, regardless of what happens with broader interest rates. A variable rate moves with the lender's prime rate, which itself moves in response to the Bank of Canada's overnight rate. Your payment can go up or down over the term.
When a Fixed Rate Makes Sense
A fixed rate tends to be the better fit when:
- You want predictable, budgetable payments for cash-flow planning
- Interest rates are expected to rise or are already elevated
- Your margins are tight enough that a payment increase would be a real problem
- You're financing over a longer term, where rate movement has more time to compound
When a Variable Rate Makes Sense
A variable rate tends to be the better fit when:
- Interest rates are elevated but expected to decline over your loan term
- Your business has enough cash-flow cushion to absorb a payment increase if rates rise
- You're financing over a shorter term, limiting how much rate movement can occur
- The variable rate on offer starts meaningfully lower than the fixed alternative
What This Looks Like With Alternative Financing
Many alternative products — revenue-based financing, merchant cash advances — use a fixed factor rate structure instead of traditional interest, meaning the total repayment amount is set upfront regardless of rate movements elsewhere. This removes the fixed-vs-variable decision entirely for those products, which is worth factoring in if rate uncertainty is a major concern for your business.
