Prime rate

The prime rate is a reference rate published by banks and widely tracked across the industry. It moves in step with the federal funds rate set by the Federal Reserve, so when the Fed raises or lowers its target, prime usually follows within a day or two. Many business loans, especially lines of credit, are priced as prime plus a margin. A lender might quote you prime plus 3 percent, meaning if prime is 7.5 percent, your rate would be 10.5 percent. That margin reflects how risky the lender judges your business to be.

Prime matters most on variable rate financing, where your rate is tied to it and can rise or fall over the life of the loan. If prime climbs, your payment can climb with it, so a quote of prime plus a margin is a moving target rather than a locked number. When you compare offers, ask whether the rate is fixed or pegged to prime, and what the margin is. A smaller margin over the same benchmark is the better deal, all else being equal.