- 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.
Frequently asked
How is the prime rate set? +
Each bank sets its own prime rate, but in practice they move together because prime closely tracks the federal funds rate set by the Federal Reserve. When the Fed raises or lowers rates, the prime rate usually follows.
What does 'prime plus 2%' mean? +
It means your interest rate is the current prime rate plus a 2% margin. If prime is 7.5%, your rate would be 9.5%. The margin reflects your business's credit risk.
Does the prime rate change? +
Yes. It moves up or down whenever the Federal Reserve changes its benchmark rate. If you have a variable-rate loan tied to prime, your payment can change when it does.
Last updated: June 2026