The Social Responsibility of Loan Selection: A Guide to Fixed and Variable Rates
Updated: Feb 13
Financing a business requires a lot of preparation to do correctly — and a social impact business, particularly B Corps, may have more requirements to think about.
B Corps have different considerations when it comes to obtaining a loan compared to traditional companies due to their unique mission and values. In most cases, B Corps need to consider:
Mission alignment: B Corps are mission-driven organizations that seek to balance profit and purpose. They may consider partnering with lenders who share their values and support their mission.
Social and environmental impact: B Corps are evaluated on their social and environmental impact, which can impact their ability to access funding. They may need to provide additional documentation and information to lenders to demonstrate their impact and the sustainability of their business model.
Financial performance: B Corps may face challenges in securing financing due to their focus on impact and sustainability, which can lead to out-of-the-norm financial performance compared to traditional companies. They may need to provide lenders with additional financial information to demonstrate the viability of their business.
Legal and regulatory requirements: B Corps are subject to specific legal and regulatory requirements that can impact their ability to access funding. They may need to consider lenders who are familiar with the B Corp movement and can provide the necessary support and guidance.
Repayment terms: B Corps may need to consider repayment terms that align with their mission and values, such as prioritizing social and environmental impact over financial returns. They may need to negotiate with lenders to find terms that are suitable for their business.
In addition to these considerations, B corps must also think about these questions before pursuing any financing option:
Why do you need a loan?
What are your negotiable and non-negotiable in a lender profile?
What type of loan structure should you choose?
How can you ensure that your business obtains the best loan terms possible?
Once they have clear answers to the questions above, they can then consider securing financing for their needs. The two main types of loan structures are fixed-rate and variable-rate loans. In this piece, we'll explore what these options are and how to decide which is best for your social impact business.
What Are Fixed-Rate Loans?
As the name suggests, fixed-rate loans come with a fixed interest rate. It does not change during the loan period.
This makes them predictable and reliable, allowing you to create accurate budget forecasts.
Fixed-rate loans are often used when businesses have a lot of different costs to cover. By opting for a fixed-rate loan, a company has a guarantee that the interest rate won't be affected due to the prime rate increases. In turn, it will not cause unwelcome surprises when it’s time to pay back the loan.
What Are Variable-Rate Loans?
Variable-rate loans come with an adjustable interest rate. It fluctuates in response to changes in market conditions.
This means there is less predictability than with a fixed-rate loan. However, it can also mean lower interest rates in some circumstances.
Variable-rate loans are often suitable for businesses that need to borrow smaller amounts of funding. It is also great if they want the flexibility to increase their loan when needed. Variable-rate loans work well for businesses that establish a large line of credit to be used and when required.
Which Is Best For Social Impact Businesses?
Ultimately, there is no one-size-fits-all solution when choosing a loan structure for your social impact business. The important thing is to assess which type of loan will best meet your needs. Then, you must make sure you get the most favourable terms available.
Researching different lenders and their loan terms can help you make an informed decision about the best loan type for your social impact business. You need assets and capital to achieve your mission, but you also have to be responsible about how you get your resources. If you are not confident 100% with the type of loan you need (or if you even need a loan to begin with), make sure you connect with your CFO to run through your numbers.
Fixed-Rate And Variable-Rate Loans Side-By-Side
One of the best ways to see which structure fits your business is by comparing them. Let's take a look at them side-by-side, considering different factors:
1. Interest Rate
Comes with a pre-set rate that remains constant throughout the loan period
Has an adjustable interest rate that can fluctuate in response to changes in market conditions
Offers less flexibility than variable-rate loans
Offers flexibility and is suited to businesses that want the option to increase or decrease their borrowing
Tends to be more expensive than variable-rate loans (they are a safer option for lenders and therefore come with higher interest rates)
Fluctuates, but may be the more cost-effective option under certain circumstances
Less risky because you know exactly how much you’ll be paying in interest
Riskier, as the interest rate can increase or decrease over time (may mean lower interest in some circumstances)
How To Decide Which Loan Structure Suits Your Social Impact Business
Innovation is on it’s way, and B Corps paved the way for corporations across the globe. As they gradually gain popularity and support across the nation, their efficiency is encouraging and demonstrating a significant benefit that calls for expansion. And here is when various loan structures come into play. The decision may take some time, but the questions and suggestions below are some frequent ones you might wish to think about.
How much does the company need? This number will help you determine the amount of capital required and narrow down the type of loan structure.
How long will repayment take? The duration will determine the length of your loan period and how much interest you'll pay in total.
What is your risk tolerance? A fixed-rate loan is probably the better option if a fluctuating rate makes you uncomfortable.
How quickly do you need access to the funds? This will help determine how fast you’ll be able to secure a loan and get the money you need.
You must also enact a system as you decide which structure to use. Here’s what you can do to choose the best option for your social impact business:
1. Review your forecast with the right intentions
B Corps can ensure that their forecasting process is aligned with their values and mission by following a few key steps. First, it is important to set clear and measurable goals that align with the organization's mission and purpose. This will help ensure that the forecasting process is focused on the right metrics and outcomes.
Secondly, B Corps should involve all relevant stakeholders in the forecasting process, including employees, customers, and suppliers, to get a comprehensive view of the business and its impact. This will help ensure that the forecast takes into account the social and environmental impact of the business and not just its financial performance.
Thirdly, B Corps should consider using alternative metrics such as the Triple Bottom Line, which takes into account financial, social, and environmental performance, instead of traditional financial metrics. Finally, B Corps should regularly review and adjust their forecast to reflect changes in the business environment and to ensure that they stay aligned with their values and mission.
2. Look for Value-Aligned Lenders Who Can Appreciate Your Mission
B Corps need to look for value-aligned lenders who appreciate their mission because having a lender who shares their values and mission can greatly benefit the organization. A lender who understands the unique challenges and opportunities facing B Corps can provide more tailored and supportive financing solutions that align with the organization's goals and impact. This can help ensure that the financing solution is flexible and responsive to the organization's needs, as well as help foster a positive working relationship between the lender and the organization.
Consider lending organizations like Business Development Bank of Canada and Vanity Community Investment Bank, which are also B Corp companies.
By having a value-aligned lender, social entrepreneurs can be confident that the financing solution aligns with the organization's values and mission, which is critical for B Corps who seek to balance profit and purpose. A lender who understands the social and environmental impact of the business can provide the necessary support and guidance to help the organization achieve its goals.
3. Seek Professional Advice Who Understands Your Needs Financially and Your Impact From Your mission
It can be helpful to seek guidance from a fractional CFO who has the expertise and experience to provide guidance and support that is tailored to the unique challenges and opportunities facing B Corps. A virtual fractional CFO can help the organization navigate complex financial and regulatory requirements, and provide strategic insights and recommendations that can help the organization achieve its mission and maximize its impact.
By working with an empathetic fractional CFO who understands the organization's financial needs and mission, B Corps can ensure that their financing strategy is aligned with their values and goals, and that they have the support and guidance they need to achieve success.
4. Prepare The Paperwork
Prepare all the necessary documentation by consulting the financing institution or organization once you have considered all your alternatives with your CFO. You should be clear already with the type of loan you need to secure that will be ideal for your social impact business. This will speed up the process and make it more convenient.
5. Secure The Best Terms
Once you've decided on a loan structure, it's time to look for value-aligned lenders who understand and appreciate your mission, and at the same time, offer the best terms. Before making your final decision, check the following:
Annual Percentage Rates
6. Plan Your Repayments
Once you've secured the loan, planning and budgeting for your repayments is important. This will help ensure that you can maintain a healthy credit score. It will also be beneficial for the company's financial security.
One’s social purpose will prosper through choosing the right help needed. In this case, deciding between a fixed-rate or a variable-rate loan for your B Corp. Taking the necessary risks is part of growing a social enterprise, but will doing so actually help it advance?
Since many financial institutions and even major organizations are now aiming to support B Corps, start by taking the time to evaluate your company's financial situation. Firms are gradually turning their priorities from profit to social goals as they appear to be aware of the innovation and advantages that B Corps possess, which gives them the confidence to support their expansion.