It is time to grow when you have a business you love so much. You need an SME loan (Small and Medium Enterprises) to move things forward. However, it can get overwhelming when you start researching which type of interest (fixed or floating) on a loan is better.
And then the terms of fixed and floating interest rates are thrown at you, and you’re left wondering which one’s right for you. MSME or SME owners often struggle to find the best loan option for their businesses. Therefore, let us break it down together, and by the end of this article, we will know where your business fits in all these.
What’s the Deal with Business Loan Interest Rates?
When you apply for a business loan, whether an MSME/SME loan, you must focus on the interest rate. It’s the cost of borrowing money, and it can significantly affect how much you’ll pay back to the lender. But it’s not just about the percentage — there’s more to the story. Do they offer fixed or floating rates? Let’s look closely at each of those.
Fixed Interest Rate
A fixed interest rate never changes throughout your loan tenure. It may be perfect for individuals who want stability. Consider the factors influencing a fixed (Micro, Small, and Medium Enterprises) MSME loan interest rate —
1. Predictable Payments
With monthly EMI at a fixed rate, there shall be no surprises. Knowing exactly how much money must be kept aside while planning to finance certain business goals becomes simpler.
2. Shielded from Market Fluctuations
Markets usually go up and down, but you don’t have to worry about that when using a fixed interest rate since it remains intact even though the economy becomes volatile.
3. Better for Short-Term Loans
Market conditions fluctuate without warning; however, such fluctuations do not affect short-term loans on a massive scale and ensure peace of mind. But, a stable fixed interest rate has a price. Usually, these rates are slightly higher than floating rates, so you might pay more in the long run. In case market rates fall, though, you will not have any advantage in paying fewer EMIs. That’s the trade-off for stability.
Floating Interest Rate
Now, let’s talk about floating interest rates. Unlike fixed rates, floating rates can change during the loan tenure. Market conditions influence such interest rates, and when they go down, your EMI follows suit as well. Sounds tempting, doesn’t it? Here is why you might choose a floating interest rate —
1. Potential Savings
The major benefit here is an opportunity to save some money when there is a drop in the market interest rates. This means extra cash in hand. Consequently, such loans may be paid off much earlier than anticipated.
2. Typically Lower Rates
Generally, these kinds of loans start at lower prices than others, like fixed ones, for instance, so if you are fine with little risk and fluctuation in markets, this will help you save money, too.
However, there is the flip side. The very nature of floating rates means they are unpredictable. With a rise in market rates, your EMIs will also increase. This can be difficult, mainly for small businesses that monitor their cash flow closely.
Fixed vs Floating Interest Rates: What’s Right for Your Business?
Picking between fixed and floating interest rates isn’t about finding the “better” option; it is about choosing one that suits your business. Here’s what you should consider —
- Risk Tolerance: Are you comfortable with some risks or prefer playing it safe? If you don’t mind fluctuations and can adjust your budget accordingly, a floating interest rate might work well for you. On the other hand, if you value stability and predictability, fixed interest rates are the way to go.
- Loan Tenure: How long do you plan to keep the loan? For short-term loans, fixed rates provide a stable environment. For longer tenures, floating rates might save you more in the long run, especially if you anticipate a drop in market rates.
- Market Conditions: Keep an eye on the economy. If interest rates are expected to rise, locking in a fixed rate could protect you from higher EMIs in the future. A floating rate could help you take advantage of lower costs if rates are likely to fall.
- Business Plans: Consider your plans for the company. Do you anticipate earning more money? This could make a variable rate less daunting because it provides more cash available to manage any potential EMI increases. Conversely, choosing a fixed rate of interest may give you peace of mind if you have constant income and no huge, expected changes ahead.
Understanding the interest rate structure is crucial when applying for an MSME or SME loan. These loans are designed to support the growth of small and medium enterprises, and the interest rate you choose can directly impact your business’s profitability.
For example, fixed or floating MSME loan interest rates will differ. Small businesses operating on lean budgets need stability in planning expenses, which comes with having fixed MSME loan interest rates. Conversely, floating MSME loan interest rates might allow you to take advantage of lower rates over time, saving you money in the long run.
Conclusion
Deciding between fixed and floating interest rates should not be done lightly; rather, it should be based on aligning the type of loan with business objectives, financial position, and risk appetite.
A fixed interest rate offers peace of mind with consistent payments, making it easier to budget and plan. On the other hand, a floating interest rate allows you to save on interest costs if market rates fall, although it comes with the risk of fluctuating EMIs.
Whatever you select, ensure it aligns with your business strategy so you can focus on what matters — growing your entrepreneurial venture.
