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How fixed rates work
A fixed interest rate is set at the outset and does not change for the duration of the facility, regardless of what happens to market rates. Your monthly payment is the same on day one as it is in the final month. This makes budgeting straightforward and removes exposure to rate increases.
The trade-off is that if market rates fall significantly during the loan term, you continue paying the fixed rate. Switching to a lower rate would require refinancing, which may incur an early repayment charge. See Will I pay a charge to repay early?
How variable rates work
A variable rate is linked to a reference rate — most commonly the Bank of England base rate — with a margin added on top. If the base rate rises, your payment rises; if it falls, your payment falls. Some agreements have a floor rate below which the variable rate will not drop, protecting the lender's minimum margin.
Variable rates typically start below equivalent fixed rates, reflecting the fact that the borrower is taking on interest-rate risk. Whether this results in a lower total cost over the loan term depends entirely on how rates move during that period.
Which suits most limited companies
For most SME borrowers taking a facility of two years or more to fund a defined project — equipment, fit-out, acquisition — a fixed rate is generally preferable. It allows accurate cash flow forecasting and removes a variable the finance director or owner-director cannot control. The premium over the variable rate is, in effect, an insurance cost against rate increases.
Variable rates suit businesses with shorter facilities, those who expect rates to fall, or those with sufficient cash flow headroom that a modest payment increase would not cause difficulty. They also suit revolving credit lines, where the drawn balance fluctuates and fixed-rate mechanics are harder to apply.
Hybrid and capped-rate structures
Some lenders offer hybrid structures — fixed for an initial period, then variable for the remainder — or variable rates with a cap, limiting how high the rate can go. A capped variable rate provides partial certainty while retaining some downside exposure if rates fall. These structures add complexity; ensure you understand the cap level, any floor, and what happens at the end of the fixed period before accepting.
Frequently asked questions
Can I switch from variable to fixed mid-term?
Some lenders allow a mid-term rate switch, usually on payment of a switching fee and subject to the lender's current fixed-rate pricing. This is not a universal feature; check whether it is available before selecting a variable-rate product if you think you may want to fix later.
Does the rate type affect the total fees I pay?
The rate type does not directly affect arrangement or documentation fees, which are typically charged as a percentage of the facility regardless. However, a lower variable start rate means lower initial interest accrual, which can reduce the total interest if rates remain low. Compare total repayable — not just the headline rate — across both options.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.