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Margin
Also called spread, rate margin.
The fixed spread a lender adds to a published index such as prime or SOFR to arrive at the interest rate on a variable-rate facility.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Variable-rate business credit is quoted in two pieces: an index that moves with the market, and a spread that does not. The note reads something like "Prime plus a stated margin," and only the index half changes over the life of the loan.
The margin is where the lender prices you specifically. Two borrowers on the same index in the same week can sit several points apart because one presented stronger collateral, longer operating history or lower leverage. Once signed, the margin is usually fixed for the term unless the agreement contains a pricing grid that steps it up or down as financial covenants are tested.
Watch for index floors. Many agreements state that the index will never be treated as lower than a set figure, so a falling index stops helping the borrower at that point while a rising one keeps passing through in full.
In asset-based lending the same word describes something different: the gap between what collateral is worth and what the lender will advance against it. Check which sense the document means before quoting it back at anyone.
Where this one catches people
Borrowers compare index quotes and ignore margins. Prime plus two and prime plus five move identically every time the Fed acts, but the gap between them never closes. The index is the part nobody controls; the margin is the part that was negotiable.
Worked through
Illustration. Two offers, both priced off prime. Offer A is prime plus 2.00, Offer B is prime plus 5.00. Suppose prime sits at 7.00 at closing: the rates are 9.00 and 12.00. If prime later falls to 5.00, they become 7.00 and 10.00 - the three-point gap survives every move in either direction. On $200,000 drawn, that gap is $6,000 a year for as long as the facility exists.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Margin — common questions
What does margin mean?
The fixed spread a lender adds to a published index such as prime or SOFR to arrive at the interest rate on a variable-rate facility.
Where does margin catch people out?
Borrowers compare index quotes and ignore margins. Prime plus two and prime plus five move identically every time the Fed acts, but the gap between them never closes. The index is the part nobody controls; the margin is the part that was negotiable.
Is margin the same as an interest rate?
Margin is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does margin apply to?
Term Loan, Business Line of Credit, SBA Loan, Asset-Based Lending.
Is there a worked example of margin?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside margin?
Advance rate, Annual percentage rate, Covenant, Interest rate, Prime rate.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.