Entrepreneurs who finance commercial activities face the same dilemma as individuals when they borrow: fixed or variable rate? Which is best for your SME? Discussion with Mathieu Talbot, Vice-President, Business Services and Corporate Financing, at Desjardins.
What criteria should be considered before choosing a fixed or variable rate?
A funding strategy is based mainly on the ability to predict the behavior of several data over time. Mathieu Talbot therefore recalls that if the exercise is difficult in normal times, it is even more so now: “Managing a company in 2023 is a complex equation. It is important to fully understand the reality of the business before making a decision. Several criteria specific to it must be considered, including the horizon of financing needs, its level of confidence in the predictability of cash flows, the projects associated with the financing and its ability to support an increase in payments. »
Are there other levers to evaluate when negotiating your loan?
The fixed or variable rate is one of the data that will influence his financial strategy, but Mathieu Talbot points out that each of the financing components is important to weigh. “The conditions of a loan can be summed up as follows: the amount, the rate, the maturity and the other commitments. The flexibility of the conditions associated with financing is decisive, especially in times of economic slowdown or uncertainty regarding expected cash inflows. The ability to make prepayments without penalty can, in particular, be a key factor for a company having difficulty establishing its future cash inflows. This strategy could have a significant impact on the final bill. »
What is the ideal term for fixed rates?
In the current unstable situation, the Desjardins business financing specialist recommends that entrepreneurs play as much as possible with the data they can control. “If it’s possible to control one of the variables in the equation, like its rate, why not fix it? Betting on the medium term is not a bad strategy in today’s volatile environment. However, should we really freeze our rate for five years? Not necessarily. A three-year rate can be advantageous because it allows you to protect yourself from further increases while avoiding setting a high rate for an extended period. »
Growing business: what is the best approach?
“If a loan is necessary for a short period, to temporarily improve its inventories (working capital), a company could choose a variable rate. Conversely, a company wishing to borrow for a longer horizon, such as acquiring a building or additional equipment (long-term assets), then the adoption of a fixed rate will be more prudent”, illustrates Mathieu Talbot. He recalls that it is also possible to combine several simultaneous strategies according to each need. “The portion of a financing that cannot be repaid quickly could be fixed rate, then the part repayable more quickly could be financed with a margin at a variable rate, for example. »