# Prime Rate

> The prime rate is the benchmark interest rate that commercial banks charge their most creditworthy customers. It serves as a starting point for pricing many business loans and lines of credit, which are often quoted as "prime plus" a margin.

## Key takeaways
- The prime rate is the benchmark banks charge their most creditworthy customers, and many business loans are quoted as "prime plus" a margin based on your credit profile.
- Prime closely tracks the Federal Reserve's federal funds rate, so it typically moves up or down whenever the Fed changes its benchmark.
- If your financing carries a variable rate tied to prime, your interest cost and monthly payment can rise or fall over the life of the loan.

## What the prime rate is

The **prime rate** is the interest rate banks publish for their lowest-risk
borrowers — typically large, well-established companies. It isn't a rate most
small businesses pay directly, but it's the **benchmark** that many business
loans, lines of credit, and credit cards are built on.

Lenders usually quote variable-rate products as **"prime plus a margin."** Your
margin depends on your credit profile, time in business, revenue, and collateral.
A stronger applicant pays a smaller margin over prime; a riskier one pays more.

### How it's set and why it moves

While each bank technically sets its own prime rate, they almost always match,
because prime tracks the **federal funds rate** set by the Federal Reserve. For
many years, prime has sat roughly **3 percentage points above** the upper federal
funds target. When the Fed raises or cuts rates to manage inflation or growth,
the prime rate typically moves the same day or shortly after.

### Why it matters for your business

If your financing carries a **variable rate** tied to prime, your interest cost
— and monthly payment — can rise or fall over the life of the loan. That's common
with **lines of credit** and many **SBA loans**.

- On a **fixed-rate** loan, the prime rate at signing helps set your rate, but it
  won't change afterward.
- On a **variable-rate** loan or line, increases in prime raise your cost, so
  it's worth knowing how often the rate can reset.

### What to watch for

Ask whether a quoted rate is **fixed or variable**, what **index** it's tied to,
and how large the **margin** is. Two offers at "prime plus" can differ a lot once
you compare margins. Hoss Capital can help you compare fixed and variable options
side by side so you understand how rate changes would affect your payments.

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