What Is a Floating Rate Loan? | Business Lending Glossary
Floating rate loans explained — how variable interest rates are set, how they change over time, and what business borrowers should know.
Definition
An interest rate on a loan that adjusts periodically based on changes in a benchmark market rate.
Explanation
Floating rates are tied to a benchmark index — commonly the prime rate or SOFR — plus a fixed spread determined by the borrower's creditworthiness. When the benchmark rises, the borrower's rate and payment increase; when it falls, they decrease. Floating-rate debt offers lower initial rates than fixed-rate products but introduces interest rate risk over time.
Example
A $250,000 line of credit is priced at Prime + 2.5%; when the prime rate is 8.5%, the effective rate is 11%, and if prime drops to 7.5%, the rate falls to 10%.
Why It Matters
Borrowers taking on floating-rate debt should stress-test their cash flow against rate increases to ensure they can service the debt if market rates rise significantly.
Frequently asked questions
Can I convert a floating-rate loan to a fixed rate?
Some lenders offer rate locks or refinancing into fixed-rate products, though this typically involves fees and requalification.
