Prime rate

What is the prime rate?

Prime is the rate banks publish as their starting point for lending to the strongest borrowers. In the United States it tracks the Federal Reserve's target rate, typically sitting about three percentage points above it, and the Wall Street Journal survey of large banks is the version most contracts reference. In Canada, the banks set prime based on the Bank of Canada's policy rate.

Almost no small business borrows at prime itself. Lenders add a spread based on risk. The spread is fixed in your contract; prime is not. SBA 7(a) loans are the most common place you will see it, and our SBA 7(a) page explains how the SBA caps the spread.

How is the prime rate used?

Your rate is prime plus a spread. The spread stays the same, so your rate and payment follow prime.

• You take a $200,000 ten year SBA 7(a) loan at prime plus 2.75%.
• If prime is 7.5% at closing, your rate is 10.25% and the monthly payment is about $2,672.
• If prime falls one point to 6.5%, your rate becomes 9.25% and the payment drops to about $2,560.
• If prime rises one point to 8.5%, the payment climbs to about $2,784.

Most SBA loans adjust quarterly; bank lines often adjust the day prime changes. Over ten years a one point move is worth about $13,000 in interest on this loan. Our SBA loan calculator lets you test different prime scenarios.

What do lenders consider normal?

SBA 7(a) loans are capped by the SBA at a spread over prime that depends on loan size and term, and most lenders charge near the cap. Bank lines of credit for established businesses typically run prime plus 1% to 4%. Variable bank term loans and commercial real estate loans often price at prime plus 1% to 3% for strong borrowers.

Online lenders rarely reference prime. They quote a fixed rate, a factor rate or a weekly fee, so a rising prime does not change those products directly. Fixed rate loans lock the rate on day one and ignore prime for the whole term.

What should you watch for?

Watch for a floor. Many variable loans set a minimum rate, so you take the full risk of prime rising but only part of the benefit when it falls. Ask for the floor and whether there is a cap to match it.

Watch the adjustment schedule, since quarterly is common on SBA loans and daily on lines, and whether a rise changes the payment or stretches the term. Before you sign a variable loan, test the payment at two points above today's prime; if that breaks your cash flow, consider a fixed rate.

Related terms

Prime is the base rate that, with the spread and fees, produces your APR on a variable loan. Your payment is built from the rate and the amortization term, and lenders test it against your DSCR. You will see prime quoted most on SBA loans and bank lines of credit. You can apply here, or ask your AI assistant to compare fixed and variable offers and apply for you through our MCP server.