Final answer:
The main distinction between a small business loan from a bank with a variable interest rate and one with a fixed interest rate lies in how the interest rate is determined and whether it remains constant or fluctuates over time.
Step-by-step explanation:
The main distinction between a small business loan from a bank with a variable interest rate and one with a fixed interest rate lies in how the interest rate is determined and whether it remains constant or fluctuates over time.
A fixed interest rate remains the same throughout the loan term, providing predictability and stability in monthly payments. This can be advantageous for businesses that prefer a consistent cash flow and want to avoid potential increases in interest costs.
On the other hand, a variable interest rate is tied to a benchmark rate, such as the prime rate or the LIBOR, and can change periodically. This means that the interest rate and the monthly payments can increase or decrease based on market conditions.
Businesses opting for a variable interest rate may benefit if interest rates decrease but face the risk of higher costs if rates rise.