One of the possible risks of entering into a business loan with a fixed rate of interest is that, over time, interest rate indexes may fall, but you are still forced to pay at a higher rate. Depending upon the extent of the rate discrepancy, you may need to consider refinancing to a lower rate and absorbing the new loan processing costs and any other early repayment penalties.

There are now a number of options available for managing the interest rate risks associated with fluctuating economic conditions. A broker can help you determine which is best, for example:

• Interest rate cap - Some lenders allow you to borrow at an interest rate that adjusts to the marketplace on a regular basis but cannot exceed an agreed upon cap. This type of loan is usually a bit more expensive to cover the lender's risk of market rates that exceed the cap.
• Interest rate range - Some lenders establish an interest rate that floats but cannot drop below a specified minimum or rise above a specified maximum. This type of loan represents less risk for the lender and is typically less expensive to the borrower.
• Rate review - Some lenders provide for a rate review at some interval, such as a one year anniversary date, and agree to make a downward adjustment if necessary.

One of the values of the fixed rate loan is the ability to predict cash needs. All of the variable solutions mean that loan repayment costs will vary depending upon market conditions, which can result in either a higher or a lower required payment. The opportunity for the rate to be lowered is to your business' advantage as long as you can tolerate the need to pay a higher rate if the circumstances change in the other direction.

The decision to enter into a business loan should be coupled with a consideration of interest rate risk. Applicants should conduct a careful review of their company's ability to withstand a loan payment increase and be knowledgeable in the general interest rate trends for their borrowing time period.