Rate floor

The minimum interest rate a variable rate loan can charge. When the index plus the spread falls below the floor, the borrower pays the floor.

A floor protects the lender when its index falls. Suppose a loan is priced at an index plus 2.5 percentage points with a floor of 6 percent. With the index at 4 percent the formula gives 6.5 percent and the floor does nothing. With the index at 3 percent the formula gives 5.5 percent, but the borrower pays 6. From there down, further rate cuts do not lower the payment.

That makes the floor part of the price. Two quotes with the same spread are not equal if one has a floor near the starting rate and the other has none.

SBA sets a fairness rule for 7(a) loans. A lender may set a floor and a ceiling only if both are in the note and the gap between the note rate and the floor is at least as large as the gap between the note rate and the ceiling. SBA’s example: with a note rate of 10 percent and a ceiling of 12 percent, the floor must be 8 percent or lower.

Fannie Mae’s structured adjustable rate loans carry a floor too, no lower than the sum of the guaranty fee, servicing fee and investor spread.

Go further

• Loan comps: Who made loans like yours, with the median reported rate and term.
• SBA 7(a) lenders: Lenders by 7(a) loans made, by state.
• SBA 7(a) payment calculator: Monthly payment with the FY2027 upfront guaranty fee, with the fee paid in cash or added to the loan.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
• SBA 7(a) or 504: which fits your loan: Both are SBA loans, and they work differently. The choice usually turns on what you are buying and how much cash you can put in.

Related terms

• Adjustable rate loan: A loan whose interest rate resets on a schedule to an index, such as prime or SOFR, plus a fixed spread, so the payment can rise or fall over the term.
• Spread (margin over an index): The fixed number of percentage points a lender adds to an index, such as prime or SOFR, to set a loan's interest rate.
• SOFR (Secured Overnight Financing Rate): A daily benchmark interest rate, published by the Federal Reserve Bank of New York, that measures the cost of borrowing cash overnight against Treasury securities.
• Prime rate: A base rate banks post for pricing short-term business loans. The Federal Reserve reports it as the rate posted by a majority of the 25 largest U.S. commercial banks.
• Term sheet: A term sheet is a short written outline of the loan a lender is prepared to consider: amount, rate, term, fees and main conditions. It is usually not binding.
• Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.