A hybrid business loan uses both fixed interest rates and variable rates at different periods during a single loan term. Hybrid loans for businesses can include a business installment loan or a line of credit.
A hybrid loan for business describes any type of lending that incorporates elements of both fixed-rate loans and variable-interest-rate loans. Some hybrid business loans are disbursed as a lump sum payment, or they may be extended as a line of credit.
Hybrid business loans, which may also be called hybrid flex loans, hybrid installment loans or hybrid lines of credit, are not as common as other types of business lending. However, hybrid loans can be useful for businesses trying to take advantage of lower interest rates at different times during the loan term, says Joe Camberato, CEO of NationalBusinessCapital.com.
“Hybrid loans aren’t typical, but they’re useful for businesses seeking stability while repaying loans. If you’re a business with a growth opportunity, you might prefer a fixed rate at first. Later, when you see a return on investment (ROI), you might switch to a variable rate, potentially saving money. It’s a practical way to manage finances through different phases of growth.”
Normally, a lump sum hybrid loan has a fixed interest rate at the beginning of the loan and then converts to a variable rate for the remainder of the loan term. A hybrid line of credit, on the other hand, starts with a variable interest rate during the draw period and then switches to a fixed rate once you enter the repayment period.
If you qualify for a hybrid installment loan, the lender issues the loan proceeds in a one-time lump sum payment. You’ll begin to repay the loan right away in equal monthly payments with a fixed interest rate. The fixed-rate period may last three or five years, but this time frame varies by lender.
After the fixed-rate period ends, your loan converts to a variable interest rate for the rest of the loan term. The variable rate is hard to predict but depends on your lender and market conditions. Lenders may also have limits on how high your rate can go up. There may also be limits on how low your rate can fall should market rates go down.
For the remainder of your loan term, your monthly payments fluctuate. This fluctuation could be good if your rates go down, but you may also face much bigger installments, which can be trickier to budget. One strategy with this loan type is to take advantage of the initially low fixed rate and then refinance to another fixed-rate business loan.
A line of credit hybrid business loan basically swaps out the timing of variable and fixed interest rates. With a line of credit, your variable rate starts at the beginning of the loan term, known as the draw period. Once the draw period is up, you’ll enter the repayment period and convert to a fixed-rate term loan.
During the draw period — usually six months to a year — borrowers can withdraw as much money as they want up to the borrowing limit set by the lender. And during this period, you are required to make interest-only payments, which can help keep initial costs down.
Once the draw period ends, you’ll switch to a more traditional, fixed-rate installment loan for the remainder of the loan term. At that point, your payments include principal and interest charges.
Hybrid revolving credit can be useful to businesses trying to keep costs low in the beginning and take advantage of the borrowing flexibility that lines of credit provide. Then, once you borrow what you need you can enjoy the predictability of regular monthly payments.
Fixed rates are typically calculated by starting with the current Federal Reserve prime rate, says Camberato. The prime rate is basically the lowest interest rate at which money can be borrowed commercially. Then, your lender usually adds two or three percentage points on top of that.
For example, if the prime rate was 8% and your lender adds two percentage points, your fixed interest rate would be 10%. If the lender adds three points, your rate would be 11% and so on.
Variable rates, by definition, can fluctuate up or down over the loan term. Depending on your lender, once you’re in the variable rate stage of a loan, your interest rate may change monthly, quarterly, semi-annually or annually, says Camberato. It’s a good idea to check with your lender, so you know when to anticipate rate changes and plan accordingly.
Hybrid business loans are not as common as other types of business lending, but you may find them at some banks and other financial institutions, says Camberato.
“You won’t stumble on hybrid rate loans as frequently as your typical fixed or variable rate loans. They’re more tailored for particular financial scenarios. You can usually spot them at banks, credit unions or even online lenders, though they might not be as commonplace as your run-of-the-mill loan options.”
There are several reasons why getting a hybrid business loan or line of credit might make sense for small businesses.
“Businesses benefit from hybrid loans by gaining stability in a fluctuating market,” adds Camberato. “These loans help manage cash flow while waiting for returns on investments, especially in high-interest rate environments where rates are expected to decrease.”
A hybrid loan or line of credit might be a good fit for your company, but knowing the risks and rewards is important.
Requirements needed to qualify for hybrid business loans are similar to other business lending options. But, because they are less common, the lending criteria could be more strict. In general, lenders analyze the following information:
If you can’t find a hybrid business loan or line of credit or aren’t satisfied with the terms, consider some alternatives.
Hybrid business loans and lines of credit offer a unique blend of fixed and variable interest rates and may offer more flexible lending options than some traditional business loans. They might be a good fit if you plan on paying the loan off early or refinancing before the variable rate period kicks in, for example. However, they may be more difficult to find than other kinds of business financing, and variable interest rates can sometimes be hard to budget for.
“Businesses might opt for hybrid loans when they need stability in a volatile market and expect interest rates to drop,” says Camberato. “The fixed rate period ensures predictability, and that’s valuable for financial planning and management.”
Hybrid loans also come in the form of hybrid personal loans and hybrid mortgage loans.
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