Variable-Rate Loans Can Impact Michigan Business Bankruptcies

Has your business fallen on hard times? Have you taken out a variable-rate loan to help you through?

While a variable-rate loan may seem like a viable solution, it’s important to understand that you’re at the mercy of changing interest rates. And as any Michigan bankruptcy attorney will tell you, an increase in interest rates can create unexpected expenses and even deeper debt for your business.

Bankruptcy attorneys in Southfield have seen firsthand how variable-rate loans can impact Michigan business bankruptcies. It may not be a gamble you should take.

What Is a Variable-Rate Loan?

A variable-rate loan can be attractive to businesses because they often offer lower interest rates than the fixed-rate version of the same kind of loan. They may even serve up an introductory rate that doesn’t fluctuate for some set amount of months. This is particularly appealing to a business owner who is looking for a short-term option for a loan.

The problem is, once that time period lapses, a variable-rate loan will then mirror what’s happening with the market. That means the monthly payments may differ from one month to the next based on interest rates. In a stable economy, this can be advantageous. In a volatile market, however, this is a serious downside. Should the interest rates increase, your monthly payments will go up as well.

Plus, unlike with a fixed-interest rate loan, you won’t know the total cost of your loan until you’ve paid it off. If those interest rates keep climbing, you could end up being even deeper in the hole than when you first sought out the loan. This is not the ideal scenario for any business that’s already struggling with cash flow issues.

How Variable-Rate Loans Can Impact Michigan Business Bankruptcies

Many business loan types offer both fixed-rate and variable-rate options. For example, a business line of credit allows you to draw funds up to a limit, with interest rates that fluctuate based on market conditions. Business credit cards also might have variable interest rates based on the market.

Both SBA 7(a) loans and SBA CAPLines have interest rates that depend on the prime rate and are often chosen for those with different types (short-term and cyclical) of working capital needs. 

An invoice financing/factoring loan allows you to borrow against outstanding invoices based on a variable rate. Meanwhile, certain commercial real estate loans feature variable rates. Particularly those with shorter terms.

Yes, a variable-rate loan can be helpful for those who are able to stay informed about economic shifts or central bank decisions, set aside extra reserves, and/or use interest rate caps to protect against sudden increases in payments should interest rates increase.

Unfortunately, many business owners don’t take the time to assess whether a variable-rate loan fits their investment timeline and risk tolerance before committing. For a company already struggling with slow accounts receivable and sales volume, increased product or material costs, higher employee benefit costs, and/or poor cash flow management, a variable-rate loan could be the kiss of death. Especially with loan products where the business owner is personally liable for the debt.

This is when a personal or business bankruptcy might be necessary.

Don’t Attempt Filing for Bankruptcy on Your Own

If you’re facing a personal or business bankruptcy because of variable-rate loan, just know that you’re not alone.  The experienced bankruptcy attorneys at Gold, Lange, Majoros, and Smalarz are here to help.

We know all too well how variable-rate loans can impact Michigan business bankruptcies and navigate this territory far better than any inexperienced or “bargain” lawyer. We know how mistakes in this area can prove very costly to our clients. Doing things the right way from the beginning is always the least expensive option. So contact us today. And trust us to help you get back on your feet.