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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.
Key takeaways
Hybrid business loans blend fixed and variable rates in one product, and can be set up as either a lump-sum loan or a line of credit.
Best for specific scenarios. They can make sense if you plan to refinance or repay before the variable phase, think rates may fall, or want early flexibility from a line of credit.
Key trade-offs. Pros include potentially lower initial rates and low upfront costs on LOCs; cons include payment unpredictability and the risk of much higher costs if rates rise.
What is a hybrid business loan?
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.
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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.
How does a hybrid business line of credit work?
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.
How do interest rates work for hybrid business loans?
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.
Where can you find hybrid business loans?
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.”
Why get a hybrid business loan?
There are several reasons why getting a hybrid business loan or line of credit might make sense for small businesses.
Plans to refinance. The initial fixed interest rate on a hybrid business loan may be lower than traditional loans, so firms can take advantage of the lower rate and then refinance before the variable rate kicks in.
Pay off the loan early. A hybrid loan might be a good strategy if your company plans to repay the loan before the variable rate period begins.
You think rates may fall. If you think interest rates will drop, a hybrid loan might make sense, as you could see your rates go down during the variable rate period.
You want borrowing flexibility. If the flexibility of a line of credit is part of your business strategy, you can benefit from lower initial costs and then enjoy a fixed-rate installment loan for the remainder of the term.
“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.”
Pros and cons of hybrid business loans
A hybrid loan or line of credit might be a good fit for your company, but knowing the risks and rewards is important.
Pros
Lower initial rates. A hybrid business loan may initially have lower interest rates during the fixed-rate period than other business loans.
Low upfront costs. A line of credit only requires interest payments during the draw period, which can keep your costs low at the beginning of the loan.
Potential for lower payments. If interest rates drop, you may see lower monthly payments.
Potential to refinance. You may be able to refinance your business loan at a lower rate before you enter the variable-rate period of a hybrid loan.
Cons
Potentially higher payments. If interest rates rise, you could wind up with very high monthly debt payments.
Less predictability. When interest rates fluctuate and your monthly payments change, it can be more difficult to set a budget.
Short draw periods. It may be possible to get longer draw periods with other business lines of credit.
Requirements for hybrid business loans
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:
Credit scores. Unless you have very good business credit, your lender may also want to look into your personal credit history as well.
Company revenue. Most lenders want to see minimum annual revenues of $100,000 or more, depending on the loan size you’re applying for.
Years in business. It’s more difficult to qualify for a business loan if you haven’t been in business for very long. Lenders may stipulate that your company is at least two years old.
Business plan and loan proposal. Unlike a personal loan, where you can use the loan proceeds how you see fit, business loan lenders want to see your business plan and proposal for how the loan proceeds will be used.
Collateral. Business loans may require collateral to secure the loan, such as some company assets. You may also need to provide a personal guarantee to qualify for the loan or line of credit.
Financial and legal documents. Lenders typically require you to provide a lot of paperwork along with your loan application. Documentation may include personal and company tax returns, business licenses, financial statements, records for existing debts and financial projections, among others. If you’d rather provide less documentation, look into a low-doc business loan.
Alternatives to hybrid business loans
If you can’t find a hybrid business loan or line of credit or aren’t satisfied with the terms, consider some alternatives.
Traditional business loans. Explore some top lenders of more conventional business loan options for borrowers with weaker credit scores.
Business lines of credit. Some lines of credit for business may have longer draw periods than hybrid credit lines, giving you more time and flexibility to satisfy your borrowing needs.
Business credit cards. Business credit cards are another borrowing option to explore and often come with added perks such as sign-on bonuses and cashback rewards.
SBA loans. Applying for business loans offered by the Small Business Administration (SBA) might be a smart move if you can meet their requirements.
Other options. Depending on the nature of your business and your financial goals for the loan, explore other types of business funding, such as invoice factoring, equipment loans, merchant cash advances and real estate loans to name a few.
Bottom line
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.”
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
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