Variable vs Fixed Rate Financing
Considerations, not predictions!
Do you want to borrow money at a fixed rate or a variable one, or some combination of the two? Each has advantages and disadvantages. If we could predict interest rates with absolute accuracy, we’d be retired by now. We can’t, and even the large banks with expert treasury departments are often wrong. That fact yields our first “maxim” about fixed versus variable—enter into a fixed rate transaction only if you want the peace of mind that it can offer, not because you think rates are going one way or the other.
The international standard for short term loans is the “London Interbank Offered Rate” or, “LIBOR”. Note that smaller banks can’t offer LIBOR loans and therefore, their interest rates are generally going to be higher than a bank that can use LIBOR. See “LIBOR Ends” here for more information on that pending change.
Most banks with whom we deal will fix rates--when desired or mandated by the bank--with an interest rate “swap” to synthetically fix the rate on a variable rate loan. That fixed rate you will then pay will generally be lower than a straightforward fixed rate loan. We can explain why and generally advise you on considerations when discussing a swap. We and our financing team can also get comparable rates at the time you decide to do the swap to be sure e you are getting the best possible fixed rate. Click here for a graphic explanation of swaps.
If your bank tries to convince you that all your debt should be at a fixed rate, you probably have the wrong bank. That will lead to your having to re-borrow every time you need something and manage a number of different loans with different rates, maturities, and principal repayment schedules—hard enough in itself—but you will also likely be paying a higher rate on each of the loans and also might incur prepayment penalties.
Historically, most of our clients have used primarily variable rate debt and some use swaps to “hedge” some of it. Throughout the last 30 years, those that have stayed in variable rate modes have generally benefited although there have been a couple of periods where a fixed rate transaction would have saved money, but for a relatively short period.
Below is a chart showing the 30-day LIBOR rate since 1985. We have highlighted in green the periods where a borrower doing a fixed rate loan at the beginning of the highlighted period, would have enjoyed savings over a variable rate. As can be seen, the periods are relatively short or at least are shorter than the amortization schedule on most loans spent on equipment or facilities with useful lives well beyond those periods.
How We Can Help
We’ll give you a list of options from which you can pick involving variable and fixed rates, types and term of debt.
Once you pick your options and we get to know you better, we will work together to assemble your choices into a “financeable” structure which will take care of your needs now and in the near future based on your plans and projections.
We can help assure that your bank adopts that structure with as few changes as possible.
If your bank doesn’t have the expertise, ability or wish to do that, we can help you find a bank that will.