Commercial Loan Interest Rates Explained: Fixed, Variable, and ARM

Most business owners focus on the loan amount. Experienced borrowers focus on the rate structure. The difference between a fixed rate and an adjustable rate — and between a 5-year ARM and a 3-year ARM — can be the difference between a loan that's comfortably serviceable and one that creates financial stress when it resets.

How Commercial Loan Rates Are Set

Commercial loan rates are typically expressed as a margin (or "spread") above an index rate. The index is a benchmark rate set by market forces or central bank policy — SOFR, Prime Rate, or a Treasury rate. The margin is the bank's profit on top of the index, reflecting the perceived risk of the specific loan.

A typical commercial loan might be priced at "Prime + 1.75%." If Prime is 7.50%, your rate is 9.25%. If Prime rises to 8.00%, your rate becomes 10.00% — automatically and without any renegotiation required.

Fixed vs. ARM — The Real Trade-Off

Fixed-rate commercial loans are less common than most borrowers expect. True long-term fixed rates (10, 15, 20 years) are primarily available through SBA 504 loans and some USDA programs. Most conventional commercial loans are actually short-term fixed / long-term adjustable — what the industry calls a balloon note with an adjustable feature.

A typical commercial structure: 25-year amortization, 5-year term, with a balloon payment due at year 5. During those 5 years, the rate may be fixed. At year 5, you refinance at whatever market rates exist at that time. If rates have risen significantly, your new payment may be materially higher.

The trade-off is straightforward: fixed rates provide payment certainty but start higher. Variable rates start lower but expose you to rate risk. For long-term real estate with predictable cash flows, fixed rates are generally preferable. For shorter-term equipment or working capital loans, a variable rate may make sense if you expect to pay it off before significant rate movement.

SOFR and Prime Rate Explained

Most commercial loans in 2026 reference either the Prime Rate or SOFR (Secured Overnight Financing Rate). Understanding these benchmarks helps you anticipate rate movements.

The Prime Rate is set by large commercial banks and historically tracks the Federal Funds Rate closely — typically Prime = Fed Funds + 3%. When the Federal Reserve raises rates, Prime rises. When the Fed cuts rates, Prime falls. Because Prime moves with Fed policy, you can monitor Federal Reserve statements to anticipate Prime Rate movements.

SOFR replaced LIBOR as the primary benchmark for many financial instruments. It's based on overnight Treasury repurchase agreements and is considered a more robust, manipulation-resistant benchmark. SOFR-based loans are becoming more common, particularly for larger commercial transactions.

How to Stress-Test Your Rate Before Signing

Before you sign any adjustable-rate commercial loan, you should model the worst-case scenario. What does your monthly payment look like if rates rise 200 basis points (2%) from current levels? 300 basis points?

• Use the BankLiterate Amortization Calculator to model your payment at current rate and at +2%, +3% scenarios
• Calculate your DSCR at each scenario — does your business still clear 1.25x if the rate rises 2%?
• Understand your refinance timeline. If your balloon comes due in 5 years and rates are 3% higher, what does refinancing look like? Can you qualify?
• Ask about rate caps. Some commercial ARMs have periodic and lifetime caps that limit how much the rate can move. Confirm whether your loan has them — and whether they're guaranteed or just typical.