Understanding how the prime rate affects your business loan is essential for any small business owner who wants to borrow money strategically. Whether you're applying for a line of credit, a term loan, or thinking about refinancing, the prime rate determines how much you pay to borrow money — both today and in the future.
This guide breaks down exactly what the prime rate is, how it moves, why lenders use it, and how each shift impacts your cost of capital. You’ll also learn how to prepare your business for interest rate changes and get the strongest loan terms possible.
The prime rate is the interest rate that major U.S. banks charge their most creditworthy corporate customers. It acts as a baseline or benchmark for many types of consumer and business loans.
Most lenders set interest rates for:
Business loans
Lines of credit
Credit cards
SBA loans (partially)
Variable-rate loans
based on the prime rate plus an additional margin.
The prime rate is heavily influenced by the Federal Reserve’s federal funds rate. When the Fed raises or lowers the federal funds rate, the prime rate usually changes within a day.
The prime rate matters because it directly influences:
How expensive your loan will be
Whether your interest rate will rise or fall
How much financing you can afford
Your long-term business planning
Cash flow stability
When the prime rate rises, borrowing gets more expensive. When it falls, financing becomes more affordable.
If your business relies on credit — even occasionally — you should understand how these changes impact your bottom line.
Several major banks — often referred to as the “money center banks” — determine the prime rate. While each bank technically has its own prime rate, they typically match each other, resulting in a single nationwide rate.
Federal Reserve interest rate decisions
Inflation trends
Economic growth
Financial market conditions
Banking sector risk assessments
For up-to-date prime rate information, you can check sources like:
The Wall Street Journal (WSJ Prime Rate) — https://www.wsj.com/market-data/bonds/moneyrates (opens in new tab)
Federal Reserve — https://www.federalreserve.gov/monetarypolicy.htm (opens in new tab)
Whether you already have financing or are applying for a new loan, changes in the prime rate have direct consequences. Below, we break down the specific ways the prime rate impacts your business.
Most business loans are priced using a formula like:
Prime Rate + Margin = Your Loan’s Interest Rate
Common margins vary between 1% and 7%, depending on:
Your credit score
Business revenue
Time in business
Type of loan
Collateral
Lender risk assessment
If the prime rate is 8.50% and your margin is +3%, your total interest rate is 11.50%.
If the Fed raises rates and the prime rate jumps to 9.50%, your new rate becomes 12.50%.
This directly affects how much you pay each month.
If your business loan or line of credit has a variable rate, your interest rate will adjust whenever the prime rate changes.
Business lines of credit
Variable APR business credit cards
Adjustable-rate term loans
Some SBA 7(a) loans
Certain equipment financing loans
When prime drops, you pay less interest.
When prime rises, monthly payments increase — sometimes significantly.
Many SBA loans, especially SBA 7(a), are tied to the prime rate.
SBA loans are typically offered at:
Prime + SBA-allowed margin caps
Margins may range from:
+2.25% to +4.75% depending on loan size and term length.
Even though SBA loans are government-backed, the interest rate still depends heavily on changes in prime.
Even a small prime rate increase of 0.25% can change your business's cash flow dramatically, particularly if you hold:
Large credit lines
Multiple loans
High outstanding balances
Higher payments → less working capital
Lower payments → more flexibility
Rising rates → harder to plan budgets
Falling rates → more predictable borrowing costs
Understanding these changes helps you plan future expenses effectively.
When the prime rate rises, lenders tighten standards.
Lenders become more cautious
Approval rates drop
Higher credit scores required
Collateral becomes more important
Debt service coverage ratio (DSCR) expectations increase
Loans are easier to qualify for
More lenders offer promotional rates
Businesses can refinance at lower costs
Prime’s movement doesn’t just affect the cost of your loan — it affects whether you can get one.
Here are the key effects in 7 steps (under 50 words total):
Increases or decreases your interest rate.
Changes variable-rate loan payments.
Influences loan qualification standards.
Affects SBA loan pricing.
Alters borrowing costs.
Impacts refinancing opportunities.
Affects business cash flow.
Not all business loans respond to the prime rate in the same way. Some loan types are heavily tied to prime, while others are not.
Below is a breakdown based on loan type.
Rate is locked
Prime changes do not affect your current payment
But new loans issued will reflect current prime levels
Rate shifts with prime
Payments may increase or decrease
This is one of the financing tools most affected by prime changes.
Lines of credit almost always use:
Prime + Margin
Whenever the prime rate moves, your interest rate updates.
SBA 7(a) loans commonly use:
Prime + fixed margin
For example:
Loans under 7 years: Prime + 2.25%
Loans over 7 years: Prime + 2.75%
Exact amounts depend on lender and SBA rules.
These typically have:
Prime + 13% to 22%
Because the added margin is so large, credit cards become rapidly more expensive when the prime rate increases.
Some equipment loans use fixed rates, while others are variable.
If variable, they’re usually tied to the prime rate or similar benchmarks.
These may use:
Prime
Treasury rates
SOFR (Secured Overnight Financing Rate)
Prime-based CRE loans will move whenever prime moves.
Prime rate shifts don’t just change your loan payments — they influence your entire business strategy.
When borrowing costs change:
Profit margins shift
Expansion plans accelerate or slow down
Inventory decisions adjust
Hiring plans change
Growth budgets realign
Businesses must update their financial projections regularly in response to rate changes.
Higher prime = higher revolving credit costs.
This affects how you:
Manage short-term inventory
Fund payroll
Cover seasonal dips
Finance receivables
If your working capital depends on credit lines, prime rate matters more than anything else.
Lower prime rate periods are often the best time to refinance.
This allows you to lock in:
Lower fixed rates
Better terms
Reduced monthly payments
When prime is rising, it’s usually better to refinance sooner rather than later.
Some businesses shift their debt strategy based on prime movements.
Switch from variable to fixed
Speed up debt payoff
Avoid unnecessary borrowing
Take advantage of low rates
Expand lines of credit
Invest in growth opportunities
Understanding the prime rate gives you leverage in long-term planning.
Even if interest rates increase, you can still safeguard your business.
If you’re concerned about rising prime rates, fixed-rate loans provide stability.
Look for opportunities to refinance:
High-interest debt
Variable-rate loans
Business credit card balances
Refinancing at lower prime rates can save thousands.
A better credit profile means:
Lower margins added to prime
Better loan terms
Higher approval chances
Raise your credit score by:
Paying bills early
Reducing debt
Avoiding maxed-out credit lines
A cash cushion helps offset higher borrowing costs.
Experts recommend 1–3 months of expenses for small businesses, and more for seasonal industries.
Some lenders offer lower margins over prime than others.
Always compare:
Fees
Term length
Loan type
A difference of even 0.5% can save thousands over the life of a loan.
A falling prime rate presents opportunities.
Cheaper financing means it may be the ideal time to:
Buy new equipment
Upgrade outdated systems
Improve efficiency
Lines of credit become more affordable, allowing more flexibility.
Lower rates allow for:
Hiring
Inventory expansion
New product development
Falling rates fuel business growth — smart owners use this to their advantage.
No. Variable-rate loans are directly affected. Fixed-rate loans are only affected when you apply for a new loan.
It typically moves in response to Federal Reserve rate decisions, which occur about 8 times per year.
Most major banks follow the same prime rate, so it is effectively standardized nationwide.
Use reputable resources like the Wall Street Journal or the Federal Reserve website.
Understanding how the prime rate affects your business loan gives you a major advantage when managing your company’s finances. The prime rate influences everything from loan affordability to cash flow to qualification standards — and knowing how it works helps you make better borrowing decisions.
Whether rates are rising or falling, you can take strategic steps to protect your business and capitalize on opportunities.