Glossary · pricing

Variable rate

Also called floating rate, adjustable rate, indexed rate.

A rate stated as an index plus a margin, so the payment changes when the index moves — which makes the monthly figure quoted at closing a snapshot rather than a commitment.

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

The five parts, read separately

Index.Which published rate, and where it is published. The Wall Street Journal prime rate, SOFR and its term and average variants, and for SBA loans an agency-published optional peg. LIBOR is gone from new lending; older documents were transitioned under fallback provisions.
Margin.The spread over the index, fixed for the life of the facility unless the agreement provides for repricing on a covenant breach or a default.
Reset frequency.Monthly, quarterly, or on the first business day of each calendar quarter. An SBA 7(a) loan adjusting quarterly reprices four times a year regardless of what the index did in between.
Floor and cap.A floor sets a minimum rate whatever the index does. Caps are far rarer than floors in small business lending. A floor set at the rate prevailing at closing gives you every increase and none of the decreases.
What changes on reset.Either the payment is recalculated over the remaining term, or the payment stays put and the term extends. The note says which, and the two produce very different outcomes.

Where this one catches people

A quoted monthly payment on a variable-rate loan is today's index expressed as a number, and businesses budget from it as though it were fixed. On a long amortisation, a two-point move in the index changes the payment materially, and the borrower who could just afford it at closing cannot at reset.

Two specific things to check. First, whether there is a floor and where it sits relative to the current index — a floor at the closing rate is a one-way bet and it is usually described as standard. Second, what the default rate does: many agreements add a default margin on top of index plus margin, so a technical breach reprices the whole loan upward at exactly the moment you are least able to absorb it.

And if you are comparing a variable-rate offer with a fixed-rate one, run both at more than one index level. Comparing them at today's index tells you nothing about which one you can live with.

Worked through

Illustrative. A 400,000 loan amortising over 10 years at prime plus 2.75 percent, adjusting quarterly, with a floor equal to the rate at closing.

Suppose prime is 7.50 percent at closing, so the rate is 10.25 percent. The monthly payment on a 120-month amortisation is about 5,342.

Nine payments in, the balance is about 382,100. Now suppose prime rises two points to 9.50 percent, so the rate becomes 12.25 percent. Recalculated over the 111 months remaining, the payment rises to about 5,770 — roughly 428 a month more, about 5,100 a year, with no change to the loan, the collateral or the business.

Suppose instead prime falls two points to 5.50 percent. Without a floor the rate would drop to 8.25 percent and the payment to about 4,933. With the floor at the closing rate, the rate stays at 10.25 percent and the payment stays at 5,342. The floor kept about 409 a month that would otherwise have been yours.

One clause, worth roughly 4,900 a year in the scenario nobody models.

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

Term Loan Business Line of Credit SBA Loan Equipment Financing Asset-Based Lending

Read next

AmortizationRepaying a loan through scheduled payments that cover interest on the outstanding balance and reduce principa… Basis point (bp)One hundredth of one percentage point, used to state rate differences precisely: 100 basis points equals 1 pe… Default rateThe pricing a contract applies after a default: an elevated interest rate on a loan, or on a purchase agreeme… Fixed paymentA set dollar amount debited on schedule regardless of what the business collected that day, as opposed to a p… Interest rateThe price of borrowed money expressed as a percentage of the outstanding balance per period — a rate that onl… Interest-only (IO)A payment structure covering accrued interest and nothing else, leaving the principal balance exactly where i… LIBOR / SOFR transitionThe replacement of LIBOR as a floating-rate benchmark with SOFR and other alternatives, and the fallback mach… MarginThe fixed spread a lender adds to a published index such as prime or SOFR to arrive at the interest rate on a… Prime rateThe benchmark published from a survey of large US banks' base lending rates, used as the index in variable-ra… SBA 7(a) loan (7(a))The SBA's main guaranteed loan program, usable for working capital, equipment, real estate, business acquisit…

Variable rate — common questions

What does variable rate mean?

A rate stated as an index plus a margin, so the payment changes when the index moves — which makes the monthly figure quoted at closing a snapshot rather than a commitment.

Where does variable rate catch people out?

A quoted monthly payment on a variable-rate loan is today's index expressed as a number, and businesses budget from it as though it were fixed. On a long amortisation, a two-point move in the index changes the payment materially, and the borrower who could just afford it at closing cannot at reset.

Is variable rate the same as an interest rate?

Variable rate 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 variable rate apply to?

Term Loan, Business Line of Credit, SBA Loan, Equipment Financing, Asset-Based Lending.

Is there a worked example of variable rate?

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 variable rate?

Amortization, Basis point, Default rate, Fixed payment, Interest 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.